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TMI Blog2018 (9) TMI 1900X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of Rs. 343.92 Crores u/s 115JB. The only issue under appeal is disallowance u/s 14A. During impugned AY, the assessee, being resident corporate assessee, was engaged in the business of Merchant Banking. 2. During assessment proceedings, it was noted that the assessee reflected exempt interest / dividend income of Rs. 24.04 Crores, which called for disallowance u/s 14A. The assessee made a suo-moto disallowance of Rs. 18.07 Lacs against the same and defended its stand vide submissions dated 16/01/2015. However, not convinced, Ld. AO, applying Rule 8D, worked out aggregate disallowance of Rs. 119.78 Lacs which comprised-off of direct expense disallowance u/r 8D(2)(i) for Rs. 18.07 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs. 101.71 Lacs. After adjusting suo-moto disallowance, the net adjustment thus made to the returned income worked out to be Rs. 101.71 Lacs, which is the sole subject matter of dispute before us. 3. Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 06/01/2017 wherein the Ld. AO was directed to follow the directions as given by Ld. first appellate authority in its order dated 23/07/2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable" Let us go through the assessment record to see the situation. During the course of assessment proceedings, the AO observed at para 3 (page 2) of the assessment order dated 30.12.2010 that the appellant is engaged in various activities like (i) Broking i.e. buying and selling share on behalf of clients, (ii) Management consultancy & financing i.e. undertaking various project studies and purchase and arranging the finance in respect of the same, (iii) Trading in shares viz., regular purchase and sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, as placed before him, has come to a finding that he is not satisfied with the correctness of the appellant's claim of expenditure. Thereafter, he has invoked Rule 8D. This is evident from the relevant paras of the assessment order we have mentioned hereinbefore. We also find that the same is in conformity with para 37 of the decision in Godrej & Boyce Manufacturing Co. Ltd. (supra). As it conforms to the above decision by the Hon'ble Supreme Court, we are not adverting to the other decisions relied on by the Ld. counsel. In view of the above, we dismiss the ground raised by the appellant in this appeal that no reason was recorded for dissatisfaction by the AO of the correctness of the claim of the appellant. 7.1 We now turn to the disallowances made by the AO. We find that the appellant had sufficient own funds and non-interest bearing funds to make the said investment in tax-free bonds, share of domestic companies and the same have been used for investing purpose. This is evident from the balance sheet of the appellant company as at March 31, 2008. In HDFC Bank Ltd (supra), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . shall be included while computing disallowance u/s 14A of the Act. The rationale for enactment of section 14A was explained by the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd (supra) as under: "Section 14A was enacted by the Parliament in order to overcome the judgments of the Supreme Court in the cases of CIT v. Indian Bank Ltd. AIR 1965 SC 1473, CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145, in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and non-taxable income, it is impermissible to apportion the expenditure between what was laid out for the earning of taxable income as opposed to non-taxable income. The effect of section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of section 14A, where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and non-taxable income, the expenditure incurred on earning nontaxable income could not be allowed as a deduction as against the taxable income. As a result of the enactment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary." 7.3.1 In Godrej & Boyce Manufacturing Company Ltd. (supra), the Hon'ble Supreme Court has held that the literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. 7.3.2 The statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A. Our decision is fortified by the decision of the Hon'ble Karnataka High Court in the case of United Breweries vs. DCIT in ITA No. 419/2009 vide order dated 31.09.2016. As we have relied on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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