TMI Blog2017 (3) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... OCHAR, Accountant Member This appeal, filed by the assessee, being ITA No. 2205/Mum/2015, is directed against the appellate order dated 06-01-2015 passed by the learned Commissioner of Income Tax (Appeals)- 21, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2011-12, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 6th February, 2014 passed by learned Assessing Officer(hereinafter called the AO ) u/s 143(3) of the Income-tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- 1. Disallowance u/ s 14A of ₹ 19,81,195/-: 1.1 On the facts and circumstances of the case and in law, the learned CIT (A) erred in upholding the disallowance u/s 14A read with rule 8D(2) of ₹ 19,81,195/-. 1.2 The learned CIT (A) ought to have appreciated that the Assessing Officer had not reached appropriate satisfaction regarding the amount disallowed by the Appellant of ₹ 2,50,000/- was not adequate. 1.3 The learned CIT (A) ought to have appreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture was incurred towards purchase of mutual fund and were carried out through an agent who used to fill up the forms and dividend and was credited to the account through ECS and cheques were collected by the agent in respect of mutual funds and hence no administrative expenditure was incurred. g. No expenditure was borne towards redeeming of mutual funds as the remittances were done through ECS. h. In case of any disallowance to be made, the assessee has made a suo moto disallowance of ₹ 2,50,000/- being amount disallowed in security transaction tax. The A.O. rejected the contention of the assessee by holding as under:- It is also important to note that a company cannot earn dividend without its existence and management. Investment decisions are very complex m nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. It is, therefore, not correct to say that dividend income/exempt income can be earned by incurring no or nominal expenditure. It is difficult to accept that a company can earn dividend income/exempt income without incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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. 158234000 98393,000 108159,500 C The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year 1514373,000 1167494000 1340933,500 A X B/C 0 (iii) 0.5% 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 5,40,798 DISALLOWANCE U/S.14A (i) +(ii)+(iii) 19,81,195 Thus the A.O. made a disallowance of expenditure of ₹ 19,81,19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture for earning dividend of ₹ 48,69,223/- when there is cautious decision for investment in mutual funds or investment in preference share of subsidiary, there is involvement of management, infrastructure, use of office and rendering of services of various employees. Because of such element of expenditure, appellant has admitted the expenditure to the extent of ₹ 2,50,000/- otherwise on the basis of argument it would have not offered such disallowance. It is important to point out that there is no convincing basis for ascertaining such disallowable expenditure of ₹ 2,50,000/-. The investment in subsidiary is also capable of exempt income, though it might be invested from strategic point of view. Because of difficulty in ascertainment of such expenditure, Rule 8D was prescribed, hence no fault can be seen in working of disallowable expenditure made by the Assessing Officer in Para 4.4 of the assessment order. In the appellant's own case Hon'ble ITAT in I.T.A. No.901 and 902 /Mumbai/2010 dated 03.06.2011, has not given any relief to the appellant and has held that Rule 8D is applicable in subsequent year, such expenditure can be disallowed in this year as v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the schedules forming part of the balance sheet is placed on record whereby the investments are reflected of ₹ 15.83 crores out of which investment in subsidiary company are to the tune of ₹ 6.40 crores . It was submitted that no disallowance is called for w.r.t. strategic investments made in subsidiary companies as the investments were made not with an objective to earn dividend income but with a view to have controlling stake in these subsidiary companies. It was submitted that the A.O. has wrongly applied Rule 8D of Income-tax Rules, 1962. It was submitted that the disallowance of ₹ 5,40,798/- was wrongly made by the AO by invoking Rule 8D(2)(iii) of Income-tax Rules, 1962 as the assessee has voluntarily disallowed ₹ 2,50,000/- u/s 14A of the Act. 8. The ld. D.R. submitted that no basis was given by the assessee with regard to the disallowance of ₹ 2.5 lacs made by the assessee u/s 14A of the Act. The A.O. had recorded the satisfaction before invoking Rule 8D of Income-tax Rules,1962. Our attention was invited to para No. 4.3 of the assessment order of the A.O. wherein it was submitted that satisfaction was duly recorded by the AO before invoki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds and no borrowed funds were utilized. The same were done through raising of capital by issue of preference shares and used to create fixed deposits which were redeemed to purchase mutual funds. c. Fresh investments were made out of preference shares issued. d. A term loan was obtained from Axis Bank amounting to ₹ 5,83,46,000/- for capital investment and towards additions to fixed assets and not utilized for investments. e. A table showing the profits earned was also submitted which shows share capital at ₹ 205883000/- and reserves and surplus at ₹ 897824000/-. f. No administrative expenditure was incurred towards purchase of mutual fund and were carried out through an agent who used to fill up the forms and dividend and was credited to the account through ECS and cheques were collected by the agent in respect of mutual funds and hence no administrative expenditure was incurred. g. No expenditure was borne towards redeeming of mutual funds as the remittances were done through ECS. h. In case of any disallowance to be made, the assessee has made a suo moto disallowance of ₹ 2,50,000/- being amount disallowed in security transaction tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income as the assessee is privy to its accounts. The assessee did come forward and gave comprehensive reply before the AO w.r.t. disallowance u/s 14A of the Act of 1961 and the primary onus/ burden cast on the assessee u/s 14A of the Act r.w.s 106 of the Act of 1872 stood discharged . Now, the onus shifted to the AO to demonstrate having regards to the accounts of the assessee as to how the suo motu disallowance of ₹ 2.50 lacs as offered by the assessee is in-correct having regards to the accounts of the assessee which exercise was not done by the AO as no satisfaction was recorded showing incorrectness of the disallowance offered by the assesse having regards to the accounts of the assessee by the AO before proceeding to adopt method as prescribed u/r 8D of Rules of 1962 . The reliance of the learned DR on the order of the tribunal in ITA no 902/Mum/2010 for assessment year 2006-07 vide order dated 03-06-2011 in assessee s own case is misconceived as the said assessment year is 2006-07 which is prior to assessment year 2008-09 wherein Rule 8D of Income-tax Rules, 1962 has held to come into effect w.e.f. assessment year 2008-09 as per decision of Hon ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not form part of the total income under the Act. Sub-section (2) of section 14A of the Act prescribes that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed, such prescribed method being contained in rule 8D of the Rules. However, the aforesaid empowerment of the Assessing Officer to invoke application of rule 8D of the Rules is superscribed by a condition contained in subsection (2) of section 14A of the Act which is to the effect that 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 expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income. The invoking of rule 8D of the Rules is permissible only when the Assessing Officer records the satisfaction in regard to the incorrectness of the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that subsection (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. Subsection (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of nontaxable income. 71. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable 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. When a statute postulates the satisfaction of the Assessing Officer Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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