TMI Blog2022 (12) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... orm of stationary, refreshment, building repairs, Misc. expenses etc. must have been incurred by the assessee. However, the assessee has nowhere made any disallowance of such expenses. AO rightly disagreed with the correctness of the claim made by the assessee. But the question arises, if the AO is not satisfied with the correctness of the claim made by the assessee, can he resort to the provisions of rule 8D(2) of income tax rule. The answer stands in affirmative but subject to one caveat, he has to refer the books of accounts of the assessee. But in the given case the AO has certainly pointed out the defects in the claim made by the assessee for the expenses against the exempted income, but he did not consider the accounts of the assessee and directly jumped to the provisions of rule 8D of Income Tax Rule for the purpose of the disallowance which have given absurd amount of disallowance of the administrative expenses as discussed above. Accordingly, we are not convinced with the approach of the AO to make the disallowance as per the provisions of rule 8D of income tax rules in the given facts and circumstances. Administrative expenses as discussed above cannot be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reto submitted that it had its own fund of Rs. 1306,00,28,895/- which is sufficient enough to make investment of Rs. 1093,54,05,787/- from which it earned both taxable as well as exempted income. Against the exempted income, it has made suo-motu disallowances by identifying specific expenses, therefore, no further disallowance needs to be made. 3.2 The assessee further contended that no disallowance under section 14A of the Act is required to be made of interest expenses as well administrative expenses in case assessee is having sufficient own fund to make such investment. The assessee in support of it contention placed reliance on the judgment of Hon ble Gujarat High Court in case of PCIT vs. Sintex Industries Ltd reported in 82 taxmann.com 171. 3.3 It was also contended by the assessee that the expenses were incurred in the ordinary course of business and not to earn exempted income. The expenses claimed would have to be incurred anyway whether there being any exempted income or not. Therefore, the expenses incurred in the ordinary course of business cannot be disallowed on presumptive basis without having direct nexus with the investment. 3.4 The assessee also contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of Rs. 2,08,49,920/- which is far more than the interest expenditure of Rs. 37,231/- incurred. Hence no disallowances of interest expense is required. 6.2 The assessee further submitted that the AO while computing the disallowance of administrative expenses considered entire investment instead of considering only those investment which yielded exempted income in the year under consideration. 7. The learned CIT(A) after considering the facts in totality deleted the disallowances of interest expenses whereas with regard to disallowances of administrative directed the AO to re-compute the disallowance after considering only those investment which yielded income during the year under consideration. 8. Being aggrieved by the order of the learned CIT(A) both the assessee and the Revenue are in appeal before us. The assessee is appeal against the confirmation of disallowances of administrative expenses as per rule 8D of Income Tax Rules, whereas the Revenue is in appeal against the direction of the CIT(A) to re-compute the disallowance considering only those investment which yielded exempted income. The relevant grounds of appeal of the Revenue in ITA No. 09/AHD/2020 reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the taxable income. Thus, the provisions of section 14A restricts the deduction of the expenses incurred by the assessee in relation to the exempted income against the taxable income. Generally, the assessee does not maintain separate books of accounts with respect to exempted as well as taxable income. In most of the cases, even the common bank account is used for the transactions relating to taxable and exempted income. Accordingly, it has become an ongoing dispute between the taxpayer and the revenue with respect to the determination of the expenditures which are not eligible for deduction against the taxable income as the expenditure pertains to the exempted income. To overcome with this issue, a method was prescribed under rule 8D(2) of Income Tax Rule to work out the expenditure in relation to the exempted income. But the revenue cannot resort to rule 8D(2) of Income Tax Rule automatically. As such, to determine the disallowance of the expenditure as per rule 8D(2) of Income Tax Rule, the AO has to record his dissatisfaction after having regard to the books of accounts for the correctness of the claim made by the assessee for the expenditures incurred in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of the assessee from taxable sources Rs. 598.05 crores Gross income of the assessee from exempted sources Rs. 10.51 crores Gross Total income of the assessee from both source Rs. 608.57 crores 12.4 Form the above we find that the percentage of exempted income in relation to the gross total income of the assessee stands at 1.73 % approx. 12.5 We further note that against the gross income of Rs. 608.57 crores, the assessee incurred administrative expenses being employee benefit expenses of Rs. 23.87 crores and other expenses of Rs. 71.56 crores only. On further analyzing the schedule of other expenses we find that all the expenses under the head other expenses cannot be attributed to exempted income. As such the details of other expenses which can be allocated between exempted and taxable income, as per the schedule of other expenses appearing in the financial statements, placed on pages 35 of the paper book, stand as under: Printing, Stationary Communication Rs. 85,44,889 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repairs, Misc. expenses etc. must have been incurred by the assessee. However, the assessee has nowhere made any disallowance of such expenses. Therefore, the AO rightly disagreed with the correctness of the claim made by the assessee. But the question arises, if the AO is not satisfied with the correctness of the claim made by the assessee, can he resort to the provisions of rule 8D(2) of income tax rule. The answer stands in affirmative but subject to one caveat, he has to refer the books of accounts of the assessee. But in the given case the AO has certainly pointed out the defects in the claim made by the assessee for the expenses against the exempted income, but he did not consider the accounts of the assessee and directly jumped to the provisions of rule 8D of Income Tax Rule for the purpose of the disallowance which have given absurd amount of disallowance of the administrative expenses as discussed above. Accordingly, we are not convinced with the approach of the AO to make the disallowance as per the provisions of rule 8D of income tax rules in the given facts and circumstances. 12.8 Before parting, it is important to note that the administrative expenses as discussed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussion, please refer the aforesaid paragraph of this order. Hence the ground of appeal of the Revenue is hereby dismissed. 15. The next issue raised by Revenue vide ground no. 3 of its appeal is that the learned CIT(A) erred in deleting the disallowances of business expenditure of Rs. 3,97,72,249/- only. 16. The assessee in the year under consideration claimed that it has launched various scheme in order to retain its customer base apart from Lavjana Scheme by way of providing gift to customers on regular basis. The assessee claimed that such expenses of Rs. 3,97,72,249/- are in the nature of business promotion which were incurred in the regular course of business. The assessee further claimed the identical business development expenses has been incurred since many years which have been claimed revenue expenditure whereas Department treated the same as capital expenditure. The dispute has been resolved by the Hon ble ITAT in own case of the assessee for earlier A.Ys. in favour of the assessee by holding the impugned expenditure as business expenses. 17. However, the AO found that the order of the ITAT has not been accepted by the department and the same has been chall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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