TMI Blog2020 (7) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... made u/s 14A of the Act but also includes substituting the claim made by the Assessee on any other reasonable basis as the AO deems it fit. In such circumstances the correctness of the AO s judgment can be reviewed but it cannot be said that the AO had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort. In view of the aforesaid legal position with regard to disallowance u/s 14A of the Act, we are of the view that the issue before the AO was debatable and therefore, resort to proceedings u/s 154 of the Act was not appropriate. Appeal of the Assessee is allowed. - ITA No.1948(Bang)/2018 - - - Dated:- 3-7-2020 - Shri N.V. Vasudevan, Vice President And Shri B.R. Baskaran, Accountant Member For the Appellant : Shri K.R.Girish, CA For the Revenue : Shri Manjeet Singh, Addl.CIT ORDER PER N.V.VASUDEVAN, VICE PRESIDENT: This is an appeal by the Assessee against the order dated 29-03-2018of the ld. Commissioner of Income Tax (Appeals) 4, Bangalore relating to AY: 2014-15. In this appeal the only issue that arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without providing any opportunity of being heard passed order u/s 154 of the Act dated 17-01-2018 wherein he worked out the disallowance u/s 14A of the Act in accordance with Rule 8D(2)(iii) of the rules and arrived at a sum of ₹ 4,504,341/- as sum that has to be disallowed u/s 14A of the Act and added to the total income of the Assessee. Since the Assessee had already offered a sum of ₹ 355,660/- as disallowance u/s.14A of the Act, the AO in his order u/s 154 of the Act disallowed ₹ 41,48,681/- being the difference between ₹ 45,04,341 and ₹ 3,55,660/- u/s 14A of the Act and added the same to the total income of the Assessee. 6. Against the said order dated 17.1.2018, the Assesee filed appeal before CIT(A). Before the ld. CIT(A) the Assessee firstly submitted that the Assessee was not given an opportunity of being heard and the order of the AO was in violation of principles of natural justice and therefore, has to be quashed. The second submission by the Assessee was that the issue as to what is the quantum of disallowance that has to be made u/s 14A of the Act is a debatable issue. The AO has to arrive at a satisfaction that the methodology of dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder. 8. The CIT(A) however, did not agree with the submission of the Assessee. He proceeded to hold that the issue was not debatable and the disallowance u/s 14A of the Act had to be worked out in the manner prescribed by Rule 8D(2)(iii) of the Rules on the basis of figures already available on record. He was of the view that the issue of disallowance u/s 14A r.w.rule 8D(2)(ii) involves examination of fund flow and application of borrowed funds and therefore, it would be a debatable issue, but disallowance under rule 8D(2)(iii) had to be made only by considering the facts and figures and was not a debatable at all. He also held that the Assessee has not given any basis for the suo-moto disallowance of ₹ 355,660/- u/s 14A of the Act. In other words, the conclusion of the ld.CIT(A) was that once the disallowance made by an Assessee in not accordance with Rule-8D(2)(iii) of the rules than the disallowance has to be made only in accordance with the said rules. The ld. CIT(A) thus rejected the claim of Assessee and confirmed the order of AO. 9. Aggrieved by the order of the ld. CIT(A) the Assessee has preferred the present appeal before the Tribunal. We have heard the submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub-sections (2) and (3) provide as follows : 14A.(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment Ltd v/s CIT 402 ITR 640 (SC) the Hon ble Supreme Court after considering several decisions of the Hon ble High Courts on the issue of disallowance u/s.14A culled out certain principles, some of those principles relevant to the present case are that as per section14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the Assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. The principle of apportionment of expenses is the principle which is engrained in Section 14A of the Act. Having regard to the language of Section 14A(2) of the Act, read wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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