TMI Blog2017 (5) TMI 839X X X X Extracts X X X X X X X X Extracts X X X X ..... does not form part of the total income having regards to the accounts of the assessee in accordance with our above directions. The assessee is directed to produce working of disallowance of expenditure incurred in relation to the earning of income which does not form part of the total income having regards to the accounts of assessee as is contemplated u/s 14A of the 1961 Act. The primary onus/burden is on the assessee to produce such working as the said facts are especially in the knowledge of the assessee. If the AO is not satisfied with the working as is submitted by the assessee as such disallowance cannot be worked out keeping in view accounts of the assessee, the AO will be justified in invoking Rule 8D of the 1962 Rules - Decided partly in favour of assessee for statistical purposes. - ITA No./6448/Mum/2014 - - - Dated:- 17-5-2017 - Sh. Mahavir Singh, JM, And Ramit Kochar, AM For The Revenue : Shri G.N. Makwana-DR For The Assessee : Shri K. Gopal Ms. Neha Paranjape -AR ORDER Per Ramit Kochar,AM : This appeal, filed by the assessee being ITA No. 6448/Mum/2014, is directed against the appellate order dated 06th August 2014 passed by learned Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1961 Act read with Rule 8D of the 1962 Rules should not be made. The assessee submitted that no expenses have been incurred by it to earn the said exempted income of dividend of ₹ 97,58,944/-. The AO rejected the contention of the assessee in view of Section 14A of the 1961 Act r.w.Rule 8D of the 1962 Rules and made a disallowance of ₹ 31,73,425/- u/r 8D(2)(ii) and 8D(2)(iii) of the 1962 Rules r.w.s 14A of the 1961 Act, vide assessment order dated 23-03-2013 passed by learned AO u/s 143(3) of the 1961 Act. 4.Aggrieved by the assessment order dated 23-03-2013 passed by learned AO u/s 143(3) of the 1961 Act, the assessee filed an appeal before the learned CIT(A). The assessee submitted that investments in shares and securities to the tune of ₹ 45,83,81,269/- is ancillary to the main business activities of the real estate development. It was submitted that the funds were borrowed in earlier years for specific purposes but investments have been made in the current financial year. It was submitted that there were no borrowings payable as of 31-03-2010.It was also submitted that interest expenses of ₹ 1,20,17,356/- and premium on redemption of debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were debited to WIP. It was submitted that there are expenses of ₹ 1,63,246/- which were expenses of statutory in nature such as audit fee,workers legal dues, profession tax rent, rates and taxes which are in no manner related to the exempt income. It was also submitted that there are expenses of ₹ 12,44,825/- which are day to day general expenses not related to exempt income incurred by the assessee.Henceit was claimed that expenses of ₹ 3,90,04,915/- (Rs. 3,75,96,844/- + ₹ 1,63,246/- + ₹ 12,44,825/- ) under the above three heads cannot be disallowed for the purposes of Section 14A of the 1961 Act. The assessee also submitted that the AO has considered all types of investments for making disallowance u/r 8D(2)(iii) of 1962 Rules r.w.s.14A of the 1961 Act, which included investments in equity shares, mutual funds and debentures. It was submitted that investments in debentures is yielding taxable income and the expenses cannot be disallowed to that effect as it never yielded exempt income. The learned CIT(A) rejected the contention of the assessee and observed that the assessee has invested ₹ 45,83,81,269/- in shares and securities inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) that although the assessee had repaid interest bearing loans before the end of the relevant financial year but on the dates of investment in shares and securities, of which the income was claimed exempt by the assessee, old interest bearing loans and borrowings stood payable in the books of account of the asssessee. The assessee could not produce any evidence to prove that the shares and securities were acquired from interest free loans was the observations of the learned CIT(A). The contention of the assessee that it had debited an expenditure of ₹ 3,75,96,844/- in its P L account for AY 2010-11 in the form of printing and stationery. Filing fee, auditor remuneration, bank charges, employees salary, bonus, ex-gratia, legal professional fee retainership fees, rent, rate, taxes, postage and courier, travelling and conveyance, repairs and maintenance, motor car expenses, sundry expenses, telephone expenses, brokerage commission, interest on loan, premium on redemption of debentures etc. to the work-in-progress were also repelled by the learned CIT(A) who confirmed the assessment order passed by the AO u/s 143(3) of the 1961 Act vide appellate order dated 06-08-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no expenditure was incurred in connection with the earning of the said exempt income and hence no disallowance of expenditure can be made by the AO. The AO invoked Rule 8D(2)(ii) and 8D(2)(iii) of the 1961 Act to make disallowance of ₹ 31,73,425/- u/s 14A of the 1961 Act. We have observed that the assessee has made investment of ₹ 45,83,81,269/- in shares and securities during the year. The details of the said investment found mentioned in assessment order / page 5 which consisted of investments in shares, debentures and mutual funds. We are agreeable with the proposition of the assessee that investments in Debentures cannot be considered as part of Investments for computing disallowance of expenditure u/s 14A of the 1961 Act as interest income earned from the debentures is taxable under the provisions of the 1961 Act and no exempt income arises from debentures and hence Section 14A of the 1961 Act cannot be invoked. We have observed from the balance sheet of the assessee that the assessee has aggregate own funds in the form of share capital/reserves to the tune of ₹ 1.62 cores and also application money received to the tune of ₹ 79.30 crores as at 31- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt expenses and interest cost incurred(net of credits, if any thereon) by the company. The AS- 2 issued by ICAI governs the valuation of inventory which is mandatory and which stipulates that inventory is to be valued at cost or net realizable value which ever is lower. Even if we considered that these administrative expenses of ₹ 3.76 crores are directly attributable development expenses to bring inventory to present status which are properly and legitimately debited to work in progress in compliance with AS-2 issued by ICAI, but still the disallowance u/s 14A of the 1961 Act is required to be made. The reason is simple and quite obvious, once the assessee has debited these expenses of ₹ 3.76 crores to the profit and loss account directly attributable development expenses to bring inventory to present status, the assessee has lodged its claim for allowability of these expenses before the Revenue and once these expenses are debited and transferred to work in progress, the same are to be added to work in progress on the credit side of profit and loss account which will enhance work in progress valuation which once allowed by the Revenue in the year of incurring of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry onus/burden is on the assessee to bring those facts before the AO of having incurred expenditure in relation to earning of income which does not form part of the total income having regards to the accounts of the assessee. Thereafter, the onus shifts to the Assessing Officer to work out the disallowance of expenditure incurred in relation to earning of income which does not form part of total income, having regards to the accounts of the assessee as is contemplated u/s 14A(2) of the 1961 Act. If the Assessing Officer is not satisfied with the correctness of the disallowance of expenditure suo motu offered by the assessee being incurred in relation to earning of income which does not form part of the total income having regards to the accounts of the assessee if the same could not be worked out from the manner in which accounts are made by the assessee, the Assessing Officer can invoke Rule 8D of the 1962 Rules r.w.s. 14A of the 1961 Act and apply method prescribed u/r 8D of the 1962 Rules for making disallowance of expenditure incurred in relation to earning of income which does not form part of the total income. Keeping in view facts and circumstances of the case, in our consid ..... 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