TMI Blog2021 (11) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the other expenditure claimed by the assessee in respect of its non-exempt income were related to its 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 his order.Accordingly, the disallowance made by the A.O u/s 14A r.w Rule 8D is vacated - Decided in favour of assessee. - ITA No.1832/MUM/2020 - - - Dated:- 8-10-2021 - Shri Pramod Kumar (Vice President) And Shri Ravish Sood (Judicial Member) For the Assessee : Shri Tejas Sodha, A.R For the Revenue : Ms. Shreekala Pardeshi, D.R ORDER PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure under Section 14A r/w Rule 8D, though the assessee has earned substantial dividend Income. 1.5 The appellant prays it be held that the provisions of section 14A are not applicable in the case of the appellant and consequently the disallowance of ₹ 1,07,16,643/- made by the AO be deleted. 2. The Appellant craves leave to add, amend, alter and / or withdraw the aforesaid ground of appeal. 2. Briefly stated, the assessee company which is engaged in activities auxiliary to financial intermediation except insurance and pension funding had filed its return of income for A.Y 2016-17 on 30.11.2016, declaring an income of ₹ 170,82,95,090/-. Thereafter, the return of income was revised on 30.03.2018 at an income of ₹ 170,31,78,560/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that though the assessee during the year under consideration had made investments in exempt income yielding securities, however, it had not attributed any expenses on a suo motto basis for earning of the exempt income u/s 14A of the Act. On bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee that no part of the expenses could be attributed to earning of its exempt dividend income was not to be accepted, had however, in a mechanical manner worked out the disallowance u/s 14A r.w. Rule 8D. In order to drive home his aforesaid claim the ld. A.R took us through the observations of the A.O recorded in the assessment order. In sum and substance, it was the claim of the ld. A.R that as the A.O without recording his dissatisfaction as regards the claim of the assessee that no disallowance was called for u/s 14A of the Act, had thus exceeded his jurisdiction and worked out the disallowance by triggering the mechanism provided in Rule 8D of the Income Tax Rules 1962. Backed by the aforesaid facts, it was submitted by the ld. A.R that as the A.O had wrongly assumed jurisdiction and worked out the disallowance u/s 14A r.w Rule 8D, therefore, the same cannot be sustained and was liable to be struck down on the said count itself. In order to support his aforesaid claim the ld. A.R had relied on a host of judicial pronouncements, as under: i. Ms Fereshte Sethna V. ACIT [[2017] 162 ITD 412 (Mumbai Trib.)] ii. ACIT V. Iqbal M. Chagala [[2014] 52 taxmann.com 94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that 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. It is, therefore, not correct to say that dividend income can be earned by incurring no or nominal expenditure. The assessee earned amounting to ₹ 3,24,96,099/- during the year as Dividend Income. It is difficult to accept that a company can earn dividend income without incurring any expenses whatsoever including management or administrative expenses as investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The term expenditure occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. Sub-section (1) of section 14A provides in unequivocal terms for not allowing deduction in respect of expenditure incurred by the assessee in relation to exempt income and sub-section (2) lays down the mechanism for determining s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the formula prescribed under Rule 8D or in the best judgment of the A.O, what the law postulates is the requirement of a satisfaction in the A.O 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. Backed by its aforesaid observations the Hon ble Court had concluded that it was only after recording the requisite satisfaction that the provisions of Sec. 14A(2) and (3) r.w Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. The Hon ble Apex Court while concluding as hereinabove had held as under: 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. As regards the nature of satisfaction that is required to be recorded by the A.O before taking recourse to the mechanism provided in Rule 8D of Income Tax Rules, 1962 for computing the disallowance u/s 14A of the Act, we find that the Hon ble High Court of Bombay in its recent order in the case of CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (2020) 429 ITR 358 (Bom), had observed, that the A.O must give a clear finding with reference to the assessee s accounts as to how the other expenditure claimed by it in respect of its non-exempt inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness or profession are taxed after deducting expenditure from income In that regard, there is no need for the Assessee to establish a one-to-one correlation between income and expenditure. The provision reads: Section 14A. Expenditure incurred in relation to income not includible in total income.- (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the Act'; it Joes not refer to 'income which does not form part of the total income in the hands of the sssessee1. Then, Kanga Palkhiwala takes note of the latest amendment under the Finance Act, 2020: that dividend distribution tax has been deleted, As long as the income is taxed, it should not attract section 14A, opines Kanga Palkhiwala. 17. Recently, this Bench disposed of a batch of Tax Appeals in CIT, Goa v. M/s. Sociedade De Fomento Industrial Pvt. Ltd, (High Court of Bombay, at Goa, Judgment, dated 22 Dctober 2020). One of the substantial questions of law there was identical to the one before us. Rejecting the Revenue's contention, this Court has noted that the respondent invested certain funds in exempted categories such as mutual funds; it earned income. During the assessment year, income from such sources stood exempted under section 10(35) of the IT Act. The only issue was whether the respondent incurred any expenditure while earning that exempted income and whether it included that expenditure in the common indirect expenditure of its own. First, the appellant noted, rather guessed, that the respondent borrowed funds to invest and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules 1962, is obligated to give a clear 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. 9. Now, we shall test the validity of the jurisdiction assumed by the A.O as regards the satisfaction recorded by him, if any, while rejecting the assessee s claim that no disallowance was called for u/s 14A of the Act; and substituting the same by a disallowance that was computed by him by triggering the mechanism provided in Rule 8D of the Income Tax Act, 1962. As observed by us hereinabove, it is a matter of fact borne from the record that the A.O had merely on the basis of his general observations, viz. that investment decisions are very complex in nature and 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 etc., had dislodged the claim of the assessee that no part of the expenses claimed by him in respect of his other non-exempt income could be attributed or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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