TMI Blog2012 (11) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... Demat charges 5,44,431 STT 25,01,067 PMS charges 3,20,898 Other 1,97,102 35,63,498 3. The AO, in the assessment order took into account DMAT charges and STT paid and added the same to ₹ 33,49,068 (computed 8D disallowance as per prescribed formula), and came to the conclusive figure of ₹ 28,31,068. He, in fact, disregarded the disallowance made by the assessee suo moto. 4. Not satisfied by the decision of the AO, the assessee approached the CIT(A), who, sustained the computation, as made by the AO. 5. Aggrieved, the assessee is now before the ITAT. 6. Before us, the AR pointed out the disallowance made by the revenue authorities and reiterated his arguments before the revenue authorities. The AO pointed out that the revenue authorities, though applied the prescribed formula under Rule 8D, and also referred to the application of ratio decided by the Hon ble Bombay High Court in Godrej Boyce Mfg. Co. Ltd., reported in 328 ITR 81, but in fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid judgment specifies that the AO is under obligation first to dissatisfy himself about the claims of the assessee on the topic before any reasonable method for any determination of disallowable sum is determined . We have the benefit of the decision of Godrej Boyce Mfg. Co. Ltd., the Hon ble Bombay High Court held, reported in 328 ITR 81, wherein the Hon ble Bombay High Court explained the intent for bringing in the provision of section 14A and its application. The Hon ble Bombay High Court observes, The insertion of section 14A was curative and declaratory of the intent of Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. However, assessees had claimed deductions in respect of income which was exempt under various provisions of the Act as a result of which the tax incentive given in respect of certain categories of income which were exempt was being utilized to reduce the tax payable on non-exempt income. This being contrary to legislative intent, section 14A was inserted in order to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated November 22, 2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) Profits and gains of business or profession; (iv) Capital gains ; and (v) Income from other sources. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. As a result of section 14A, the permissible deductions can be allowed only with reference to income which is brought under one of those heads and is chargeable to tax. If an income does not form part of the total income, then the related expenditure is liable to be disallowed. The test which has been enunciated in Walfort for attracting the provisions of section 14A is that there has to be a proximate cause for disallowance which is its relationship with the tax exempt income . Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A. The following principles would emerge from section 14A and the decision in Walfort : (a) The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) Section 14A(1) is enacted to ensure that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The method, having regard to the meaning of the expression prescribed in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the 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, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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