TMI Blog2021 (10) TMI 1096X X X X Extracts X X X X X X X X Extracts X X X X ..... ar finding with reference to the assessee s accounts as to how the expenditure claimed by the assessee in respect of its non-exempt income were related to the exempt income; is no more res-integra pursuant to the aforesaid judgments of the Hon ble Apex Court. The failure on the part of the A.O to strictly comply with the aforesaid statutory obligation that was cast upon him, can safely be gathered from the fact that there is no clear finding by him with reference to the assessee s accounts, as to how to the other expenditure claimed by the assessee in respect of its non-exempt income were related to the exempt income - a simpliciter rejection by the A.O of the aforesaid claim of the assessee which is only backed by his general observations, surmises and conjectures can by no means justify the validity of the jurisdiction assumed by him for computing the disallowance u/s 14A r.w. Rule 8D(2)(iii) in the hands of the assessee. We, thus, not finding favor with the view taken by the CIT(A) who had upheld the validity of the jurisdiction assumed by the A.O for computing the disallowance u/s 14A r.w Rule 8D(2)(iii) set-aside the same - Decided in favour of assessee. - ITA No.2001/MUM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or earning exempt income, therefore, no disallowance u/s 14A was called for in its case. In order to buttress its aforesaid claim the assessee had drawn support from the assessment framed in its case for the last five years wherein no disallowance was made under Sec. 14A of the Act. However, the A.O not finding favor with the contentions advanced by the assessee rejected the same. Observing, that it would not be possible to earn dividend income or to make investments without incurring any expenditure, the A.O was of the view that the claim of the assessee that no indirect expenditure was incurred for earning of the exempt income did not merit acceptance. It was observed by the A.O that an assessee could not earn substantial dividend income without incurring any expenditure, whatsoever, including management or administrative expenses. In order to drive home his aforesaid claim the A.O observed that as substantial market research, day to day analysis of market trends and decisions with regard to acquisition, sale of shares at the most appropriate time etc. were required to be carried out, therefore, deployment of substantial part of capital towards investment in shares and incurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the ld. A.R that as no new investment was made during the year, therefore, no expenditure could be attributed for earning of the exempt dividend income. It was submitted by the ld. A.R that the dividend income was directly received in the assessee s bank account through electronic mode. It was submitted by the ld. A.R that though the assessee had categorically stated before the lower authorities that no disallowance u/s 14A was called for in its case, however, the latter without recording any satisfaction as to why the aforesaid claim of the assessee was not to be accepted, had summarily taken recourse to the mechanism provided in Rule 8D of the Income Tax Rule 1963 and worked out the disallowance u/s14A of the Act. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the A.O without recording any dissatisfaction as regards the claim of the assessee that no part of the expenditure was liable to be disallowed in respect of its exempt dividend income, had thus, most wrongly assumed jurisdiction and worked out the disallowance u/s 14A of the Act. 6. Per contra, the ld. Departmental Representative (for short D.R ) relied on the orders of the lower aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management. Investment decisions are very complex in nature. They require substantial market research, day to day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides investment decisions are generally taken in the meetings of Board of Directors for which administrative expenses arc incurred. It is therefore, not correct to say that the dividend income can be earned by incurring no or nominal expenditure. 4.4 The insertion of section 14A with retrospective effect is the serious attempt on the par! of the 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 against the taxable income. In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are re la table to earning of taxable income, Therefore, the basic object of introduction of section 14A into the Act is to disallow the direct and indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of any disallowance does not arise cannot be accepted. Therefore, the disallowance u/s 14A r.w.r 8D is worked out as under: 1. The amount of expenditure directly related to the tax free income = Nil 2. Interest which is not directly related to the exempt income = Nil 3. 0.5% of the average of the opening and closing balances of the investments on which dividend has been earned = (2555.97 (lakh) + 2561.27 (lakh)] /[2] * 0.5% = ₹ 12,79,310/-. 8. Before adverting to the issue in question i.e as to whether or not the A.O had rightly assumed jurisdiction and dislodged the assessee s claim that no expenditure could be attributed to earning of the exempt dividend income, we think it apt to first cull out the position of law pertaining to the said issue. The Hon ble Supreme Court in the case of Godrej Boyce Manufacturing Company Ltd. Vs. DCIT Anr. (2017) 394 ITR 449 (SC) had, inter alia, held, that the A.O is obligated to mention the reasons while concluding that the claim of the assessee that no expenditure was incurred to earn the exempt dividend income was not to be accepted. It was observed by the Hon ble Apex court that sub-section (2) and (3) of Sec. 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (₹ 270.51 crores as on 1.4.2001 and ₹ 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While It is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. Also, the aforesaid view was once again reiterated by the Hon ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). In its aforesaid order, it was, inter alia, observed by the Hon ble Court that before taking recourse to the theory of apportionment a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord reveals, the Assessee received dividend income of ₹ 13,85,03,376/-. It was exempted under the IT Act. The Assessee claimed that he did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the Assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The Assessee only issued the cheques. The AO disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the Assessee could not have invested in the mutual funds. The AO took the view that section 14A clearly applied to the Assessee's case. The AO accordingly invoked Rule 8D and computed the disallowance at 0.5% of ₹ 381,67,09,7317-, the average investment. Then, he disallowed ₹ 1,90,83,548/-. The Assessee appealed to the CIT(A). Indeed, the appellate authority confirmed the AO's disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal's view is sustainable. 12. Section 14A, inserted by the Finance Act 2001 with retrospective effect from 1 April 1962, aims to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an interesting word about this 'inequitable and unfair1 provision. According to Kanga Palkhiwala, on a cursory reading, section 14A seeks to prevent a deduction that may result when income does not form part of the taxable income. But the expenditure incurred to earn that income is allowable as a deduction. However, this section and Rule 8D have been amended several times. Those amendments have resulted in highly unfair consequences for Assessees who earn dividend income. The object of exempting dividend income under section 10(34) and income from mutual funds under section 10(33) was to encourage investments in shares and promote savings. 15. Dividends are not taxed in the hands of the shareholder, but it would be incorrect and anomalous, according to the revising author, to state that dividends are a category of income which does not suffer any tax. The object of section 14A is to disallow expenditure on income which has not suffered tax. That said, under section 115-O, the dividend is taxed at the time of distribution at the prescribed rate. That means, tax is paid by the company irrespective of whether an Assessee has income below the taxable limit. Had the dividend be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. The AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section I4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee's accounts as to how the other expenditure claimed by the Assessee out of the non-exempt income is related to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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