TMI Blog2020 (10) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent : Ms.R.Hemalatha Senior Standing Counsel JUDGMENT DR. VINEET KOTHARI, J. This Tax Case Appeal has been filed by the Assessee, challenging the order passed by the Income Tax Appellate Tribunal, 'B' Bench, Chennai, dated 12.05.2016, for the Assessment Year 2010-11, by raising the following substantial questions of law: 1.Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in upholding the disallowance made under Section 14A of the Income Tax Act? 2.Whether under the facts and circumstances of the case, the Tribunal could have concluded that the appellant had incurred expenditure in relation to income not includable in the total income warranting application of the Section 14A read with Rule 8D? 3.Whether under the facts and circumstances of the case, the disallowance under Section 14A could be made without any satisfaction that the appellant had incurred expenditure in relation to the income not includable in the total income? 4.Whether under the facts and circumstances of the case, the disallowance under Section 14A could exceed the income not includable in the total income? 5.Whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure under Section 14A of the Act as made by the Assessee that it is not satisfactory for such cogent reasons as specified and therefore, the same is liable to be rejected and therefore, the computation method under Rule 8D can be invoked as a legislative way out to compute the quantum of disallowance. Unfortunatley, the Revenue Authority and the Tribunal have read Rule 8D without context and as an independent provision of disallowance, as if it was an island provision of law and the disallowance computed as per Rule 8D of the Rules can go beyond the exempted income itself and can be added as a taxable income in the hands of the Assessee. Such an interpretation put by Revenue Authorities is pathetic, to say the least. 14. It is well settled that the Rule cannot go beyond the main parent provision. Therefore, what has been provided as computation method in Rule 8D cannot go beyond the roof limit of Section 14A itself under any circumstances. The Courts have time and again reiterated this correct, reasonable and clear position of law. But, merely to somehow make more disallowance and impose tax on the hypothetical income of the Assessee, in contrast to the concept of real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure to earn that income and therefore, a larger disallowance under Rule 8D should be allowed, is only an ingenuity of argument covered by the absurdity thereof. The disallowance of expenditure incurred for the year in question only can be considered under Section 14A of the Act and no such hypothetical earning in future as against no expenditure incurred for that, is envisaged under Section 14A of the Act. 17. With respect to the learned counsel for the Revenue, we cannot accept such unfounded and imaginary situtations and submissions. The nature of investment has nothing to do with Section 14A of the Act. It is the exempted income in the form of dividend which forms the cap or roof limit for disallowance. Firstly, the Assessee has to apportion the expenditure incurred in the form of interest on borrowed funds if any or the expenditure incurred by him to earn such dividend income, which is exempt from tax and if at all the Assessing Authority is not satisfied with that declaration of the assessee, after recording such reasonable and cogent satisfaction only, he can resort to the computation method under Rule 8D of the Rules and compute such disallowance with a caveat that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average investment as follows: 2009-10 ₹ 98,16,104/- 2010-11 ₹ 1,69,84,915/- 2011-12 ₹ 2,39,01,020/- The assessee divident income received and claimed as exempt for these assessment years are as follows: 2009-10 ₹ 41,024/- 2010-11 NIL 2011-12 ₹ 74,00,00/- 19. Obviously such disallowance has far exceeded the exempted income in the form of dividends even though computed at the rate of 0.5% of the average investment made by the Assessee. In our opinion, the same is not permissible at all, because this average disallowance as computed under Rule 8D could be disallowed only if Assessee had actually earned Dividend income in excess of such amount of disallownace, that too after recording reasons for rejecting the apportionment of expenditure so incurred or claim that no such expenditure was incurred to earn that much of Dividend income was validly rejected by the Assessing Authority. We do not find any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definitely incurred expenses towards earning exempt income. iv.As there is no direct expense relatable to the exempted income and no interest expenses relatable to direct income, % of average investments as provided in the 3rd limb of Rule 8D worked out as under is disallowed u/s.14A and added back to income under the head income from business or profession : % OF AVERAGE INVESTMENTS YIELDING EXEMPT INCOME 986841 INVESTMENTS AS ON 31.3.2010 212191624 INVESTMENTS AS ON 31.3.2009 182544674 AVERAGE INVESTMENTS 197368149 DISALLOWANCE U/S 14A 986841 5.We find some force in the submission of the learned counsel for the Assessee. 6.However, since both the learned counsel are agreeing that the matter should go back to the Assessing Authority for deciding the case again on the aspect of Section 14-A of the Act in accordance with the Division Bench judgment of this Court in M/s.Marg (cited supra), the appeal is accordingly disposed of, by answeri ..... 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