TMI Blog2018 (10) TMI 1770X X X X Extracts X X X X X X X X Extracts X X X X ..... es laid down by the Hon ble High Courts and Supreme Court. We are of the view that the Ld CIT(A) was justified in holding that the AO was not justified in invoking Rule 8D to compute disallowance u/s 14A, without showing that he was not satisfied with the amount of disallowance worked out by the assessee. Accordingly we uphold the order passed by Ld CIT(A) on this issue. Ld CIT(A) that the assessing officer was not correct in law in applying the provisions of Rule 8D in both the years, since the AO has failed to show/record, having regard to the accounts of the assessee, that he was not satisfied with the disallowance computed by the assessee. We have upheld the order passed by Ld CIT(A) in setting aside the disallowance worked out by the AO. We have also noticed that the Hon ble Supreme Court has held in the Maxopp Investment Ltd [ 2018 (3) TMI 805 - SUPREME COURT ] that the disallowance u/s 14A shall be triggered if exempt income ie. earned, even if the shares are held as stock in trade. Under these set of facts, the disallowance worked out by the assessee should be considered as meeting the requirements of sec.14A of the Act. - Decided against revenue - ITA Nos. 520 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T Rules 1962: 4.1 On perusal of the Computation of Income, it is noticed that during the year the assessee has earned dividend income of ₹ 3,94,67,098/-, which is claimed to be exempt, The assessee is showing inventories in the form of closing stock of shares, securities and claims worth Rs,243,14,97,164/-(P.Y. ₹ 229,86,85,468/-) as at the end of the year under scrutiny. The assessee ought to have made disallowance of expenditure in relation to the income which does not or shall not form part of total income as required u/s. 14A in accordance with the provision of Rule 8D. 4.2 During the course of assessment proceedings, assessee was asked to explain as to why disallowance u/s 14A read with Rule 8D should not made in its case. In response to the same, assessee vide letter dated 17.12.2014 submitted the disallowance made on account of expenses related to exempt income is of ₹ 6,01,184/- as per computation of total income. The assessee vide letter dated 29.12.2014 furnished working of disallowance u/s l4A (without prejudice to earlier letter dated 17.12.2014) wherein disallowance is being worked out as per provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable u/s. 14A of the Act, if the same are allowable under any other provisions of the Act is without any merit and the same is rejected. d) Also even if it is presumed that the assessee has proved that the investment was made partly out of own funds and partly from borrowed funds, still its claim of interest paid for business purpose and not for investment are unacceptable. Because the assessee has not proved that interest paid is directly attributable for advances made. So, nexus can be proved only when such comparisons are made with inflow and out flow of funds on one to one basis. In absence of any evidence to prove one to one nexus of funds received and utilized, it gives only a distorted picture and lead to incorrect conclusions. In absence of any evidence to prove one to one nexus of funds received and utilized, it can only be inferred that, interest bearing loans were also utilized for making investment in shares, the income received on it by way of Dividend has been claimed as exempt. It is also to be stated here that even if the investment were made out of own funds, still, to hold and maintain/manage the investments, the assessee has incurred expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construed to be retrospective because they authoritatively set forth the original legislative intent. Parliament placed the matter beyond doubt by legislating upon Section 14A with retrospective effect from 1 April 1962. This was also amplified in CBDT Circular 14 of 2001. Various Courts have, time and again, held that making of investments and earning of exempt income requires efforts. The administrative and other expenses incurred by the assessee company facilitate earning of all incomes including the exempt income. The funds of the business are a mix of own as well as interest bearing borrowed funds. The assessee has not demonstrated the utilization of interest bearing unsecured loans for the purpose of business other than making of investments. Therefore, the application of such interest bearing funds towards making investments for earning of exempt income cannot be ruled out. These are valid inferences based on the facts of the case. In this connection, reliance is placed on the following judgements/decisions : ( i) Distributors (Baroda) Pvt. Ltd. [155 ITR 120 (SC) ( ii) Godrej Boyce Mfg. Co. Ltd. vs. DCIT (234 CTR 1 (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of IT Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income for disallowance to be triggered. Also, section 14A of the Act does not use the word income of the year but income under the Act . This also indicates that for invoking disallowance u/s 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. Accordingly the AO computed disallowance u/s 14A of the Act for assessment year 2012-13 by applying the provisions of Rule 8D of the I.T Rules. The disallowance so made by the AO worked out to ₹ 2015.08 lakhs. On identical reasons, the AO computed disallowance in AY 2013-14 also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in invoking Rule 8D and computing disallowance u/s 14A at ₹ 20,15,08,828/-. 7. The assessee also contended that the shares are held by it as Stock in trade and hence the provisions of Rule 8D cannot be applied to it. In this regard, the assessee relied upon the decision rendered by Mumbai bench of Tribunal in the case of India Advantage Securities Ltd (ITA No.1131 of 2013) and the decision rendered by Hon ble Karnataka High Court in the case of CCI Ltd vs. JCI (250 CTR 291). The assessee also contended that the provisions of Rule 8D would fail in its case, since it did not hold any shares as its investments. The Ld CIT(A) was also convinced with this contention of the assessee and accepted the same. The relevant observations made by Ld CIT(A) in AY 2012-13 are extracted below:- 6.2 Further, I am inclined to agree with the appellant's submission that computing disallowance under Rule 8D(2)(ii) and 8D(2)(iii) was not correct in this case, since the appellant is a trader in shares and securities and the same are not held as investments. So the value of investment in terms of Rule 8D(2) would be Nil and there would be no such dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 34,87,500 This does not include investment in shares. The entire holding of shares and securities are reflected in Schedule VI - current assets, loans and advances- inventories, closing stock of shares, securities and claims of ₹ 22,98,685,4687-. In view of the above said decisions of the High Court of Bombay, in the case of India Advantage Securities Ltd. and HDFC Bank Ltd., it is held that the disallowance worked out under Rule 8D amounting to ₹ 20,15,08,8287-, by considering the closing stock of shares as investments in shares, was not correct. In this case, the appellant has already worked out the disallowance considering the actual expenditure of earning dividend income of ₹ 601,1847- in the return of income. In view of the above discussion, the addition of ₹ 20,15,08,8287- is found to be without merits and is deleted. The grounds No. 1 2 taken by the appellant For A.Y 2012-13 are allowed. Since ground no. 3 is without prejudice to the grounds No. 1 2, the same is dismissed in view of the relief allowed with respect to these grounds. 8. The Ld CIT(A) de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer has rightly computed disallowance by applying provisions of Rule 8D of the I.T Rules. 11. The Ld A.R, on the contrary, submitted that the assessee s main objective in purchase and sale of shares is to earn profit on sale of shares and hence the dividend income earned by it is only incidental income arising on account of holding of shares on the record date prescribed for declaration of dividend. He submitted that all the expenses incurred by the assessee are in connection with trading in shares only. The assessee shall be incurring all the expenses debited to the profit and loss account, even it does not earn any dividend income at all. Accordingly, the Ld A.R submitted that all the expenses are related to trading activity only and none of it is related to dividend income, which is exempt from taxation. The Ld A.R submitted that, despite these facts, the assessee has voluntarily disallowed a sum of ₹ 6.01 lakhs and ₹ 10.46 lakhs in AY 2012-13 and 2013-14 respectively to meet the requirements of sec.14A of the Act. 12. The Ld A.R submitted that the provisions of sec.14A(2) prescribes a mandatory condition that the AO should examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure in relation to income which does not form part of the total income under this Act. ( 3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him 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. Sub.sec.(2) of sec.14A is relevant for our consideration. The power to disregard the computation made by the assessee is given to the AO under sub.sec(2) of sec. 14A of the Act. It prescribes that the AO can determine the quantum of expenditure to be disallowed only if 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 such expenditure in relation to income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectness 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 . ( b) Extract from the judgment of Hon'ble Bombay High Court in the case of Reliance Capital Asset Management Ltd. 86 taxmann.com 200 (Bom.) The Assessing Officer did not specifically record that he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure in relation to the income which does not form part of the total income under the Act. However, he felt obliged and going by the presence of Rule 8D that once Section 14A is attracted, the disallowance is to be made as per Rule 8D only which has been prescribed by the Legislature. The Assessing Officer has not adverted to the plain language of subsection (2) of Section 14A. It is that mistake committed by the Assessing Officer which was partially corrected by the First Appellate Authority. The First Appellate Authority agreed with the assessee that the Assessing Officer has not commented ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible . ( e) Extract from the judgment of Hon'ble Calcutta High Court in the case of REI Agro Ltd. GA No. 3022 of 2013 The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that no expenditure was made by the assessee... the disallowance under section 14A of the Income Tax Act, 1961 is plainly contrary to the provisions of the statue. The CIT, in the circumstances, allowed the appeal of the assessee and the Tribunal did not interfere . ( f) Extract from the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. 4021TR 640 (SC) Having regard to the language of Section 14A(2) of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the Hon ble Delhi High Court has held in the case of Cheminvest Ltd (317 ITR 86) that disallowance u/s 14A can be in a year in which no exempt income has been earned or received by the assessee. This interpretation of the AO is not correct as the Hon ble Delhi High Court has held otherwise, i.e., no disallowance is required when there is no exempt income. Thus, we notice that the AO has proceeded to invoke the provisions of Rule 8D of the I.T rules, without showing that he was not satisfied with the workings given by the assessee having regard to the accounts of the assessee. Further, the understanding of AO with regard to the disallowance u/s 14A of the Act is inconsistent with the principles laid down by the Hon ble High Courts and Supreme Court. 16. In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in holding that the AO was not justified in invoking Rule 8D to compute disallowance u/s 14A, without showing that he was not satisfied with the amount of disallowance worked out by the assessee. Accordingly we uphold the order passed by Ld CIT(A) on this issue. 17. Further, the Ld CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e u/s 14A shall be triggered once exempt income is earned by the assessee. 19. We have noticed that the assessee has disallowed a sum of ₹ 6.01 lakhs and ₹ 10.46 lakhs in AY 2012-13 and 2013-14 respectively u/s 14A of the Act. We have upheld the view taken by Ld CIT(A) that the assessing officer was not correct in law in applying the provisions of Rule 8D in both the years, since the AO has failed to show/record, having regard to the accounts of the assessee, that he was not satisfied with the disallowance computed by the assessee. Under these set of facts, we have upheld the order passed by Ld CIT(A) in setting aside the disallowance worked out by the AO. We have also noticed that the Hon ble Supreme Court has held in the Maxopp Investment Ltd (supra) that the disallowance u/s 14A shall be triggered if exempt income ie. earned, even if the shares are held as stock in trade. Under these set of facts, the disallowance worked out by the assessee should be considered as meeting the requirements of sec.14A of the Act. Accordingly we uphold the order passed by Ld CIT(A) on this issue in both the years under consideration. 20. In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X
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