TMI Blog2023 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... to demonstrate that claim of the assessee was incorrect. In the present case, it is evident from the satisfaction recorded by the AO of the assesses claim of expenses relating to exempt income not being correct, that it is merely based on general observations with no reference to the accounts of the assessee. AO, we find, has expressed his dissatisfaction with the claim by giving general reasons stating that investment decisions were very complex in nature, they required substantial market research, day-to-day analysis of market trends and decisions etc. and also required huge investment in shares and consequential blocking of funds. He has not recorded any dissatisfaction having regard to the accounts of the assessee. The satisfaction of the AO, has to be an objective satisfaction, and it cannot be based on general statements made; statements which are not supported with any facts or figures. Therefore, we have no hesitation in holding, that the satisfaction recorded in the present case by the AO did not fulfill the requirements prescribed by the law u/s 14A(2) - Decided in favour of assessee. - Smt. Annapurna Gupta, Accountant Member And Shri T.R.Senthil Kumar, Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Hon ble Apex Court in the case of Maxopp Investment Ltd. CIT, (2018) 402 ITR 640 (SC) laying down the law that the satisfaction of the AO ,that the assessee s claim of expenses pertaining to exempt income is not correct, is a prerequisite for invoking Rule 8D of the Rules for computing the quantum of disallowance to be made under section 14A of the Act. The ld.DR did not dispute this proposition of law. 6. The dispute in the present case is only vis a vis existence of such satisfaction so as to justify invoking Rule 8D of the Rules for computing disallowance of expenses u/s 14A of the Act. In this regard our attention was drawn to the explanation offered by the assessee regarding its claim of expenditure pertaining to earning of exempt income, which is reproduced at page no.2 to 4 of the assessment order as under: Applicability of Section 14A. Without Prejudice It is pertinent to note that ours is a cash rich company and having sufficient surplus fund as part of reverses and surplus. It is also pertinent to note that net profit before tax for the year under consideration is Rs. 10,18,89,208/- which works out to be 67.61 0% of turnover Rs. 15,07,06,227/-). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich does not form part of the total income. In the above context it is very much clear that the legislature wants to tax expenditure incurred in relation to income which is exempt from tax. In our case of, no such expenditure has been incurred for earning exempt income except voluntarily disallowed. Under section, 14A Sub-Section (2) provides the procedure for determining the amount of expenditure incurred by the assessee in relation to such income which does not form part of the total income if the A.O. is not satisfied with the correctness of claim of assessee in respect of such expenditure. Sub-Section (3) further provides that the provisions of Sub-Section (2) shall apply in relation to a case where an assesses claims that the expenditure incurred by the assessee and A.O. is not satisfied with the contention of the assessee. Further, the procedure for determining the amount of expenditure incurred in relation to the exempt income is to be worked out in accordance with Rule 8D. On going through the above, it is clearly noticed that the purpose of these two Sub-Sections is to determine the amount of expenditure incurred in relation to exempt income. These only lay down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoked. At para-4.1 of the order is as under: 4.1 The assessee's reply has-been considered but it is not acceptable for the following reasons: 1. 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 investments in shares and consequential blocking of funds. (ii) It is well known that capital has cost and that element of cost is represented by interest. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. (iii) Had this money been not invested into various instrument from which assessee will have /had exempt income then it would have been available to the assessee for its business purposes and to that extent it may not have been necessary to borrow from the banks. And it is not out place to mention that as assessee claims that it had surplus funds then why need of borrowing arose for business purpose as claimed by assessee itself. Moreover, it cannot be said that because, in the concerned assessment year investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure with income which does not form part of the Total Income - a disallowance u/s 14A has to be effected. (vii) Further, in Laxmi Ring Travellers vs ACIT ITA 2083/Mds/2011- order dated 2/03/2012 it was pointed out that Rule 8D is mandatory from AY 2008-09 even when assessee claims that no expenditure was incurred to earn exempt income. (viii) Section 14A makes a distinction between exempt income and taxable income. It treats both of them as separate classes for computation of income after allocation of expenditure relating thereto and mandates that no deduction in respect of any expenditure shall be allowed against taxable income which is incurred in relation to exempt income. The underlying object is to compute both the exempt income and taxable income correctly, which is possible only after the expenditure incurred in relating thereto is allocated to them. In other words, section 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable income, as this would have the effect of artificially inflating the exempt income and thereby deflating the taxable income. (ix) The term expenditure occurring in section 14A would take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which he replied that they were only excess funds which were not required immediately for business needs. As he is in possession of this special knowledge so only he can provide such information that on the day of investment how much of surplus was present. More over it is to be noted that even if contention of assessee is accepted about that this fund is not in immediate need, then also it does not mean that this fund was not needed for whole financial year. And it is not out of the place to mention that assessee has incurred borrowing cost of.... Thus such logic falls flat on its face. In such a situation alternatively not to prejudice to above arguments it can be seen that the interest expenditure incurred on borrowed funds cannot be allowed as business expenditure u/s 36(1 )(iii)of the act. For the reasons stated above the assessing officer is satisfied that the provisions u/s 14A and Rule 8D are attracted in this case. 8. The argument of the ld.counsel for the assessee was that it had been clearly pointed out to the AO that all expenses pertaining to the investment made by the assessee, which had earned or were capable of earning exempt income by way of dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assessee. He, therefore, stated that the dissatisfaction of the AO with the assesses claim of disallowable expenses u/s 14A of the Act was not in accordance with law, and invocation of Rule 8D of the Rules, therefore, was against the provision of law. 10. In this regard, he referred to various decision of the ITAT as well as Hon ble High Court, which were placed before us in the Index running from A to J , more particularly, our attention was drawn to the decision of Hon ble Gujarat High Court in the case of Pr.CIT Vs. Gujarat State Fertilizers Chemicals Ld., wherein he pointed out that the Hon ble Gujarat High Court had categorically stated that having regard to section 14A of the Act before invoking Rule 8D, the AO is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctnessof the claim of the assessee in respect of such expenditure, in relation to the income which does not form part of the total income. He drew our attention to para 18 of the said order, which reads as under: The language of section 14A of the Act is plain and clear. Before invoking rule 8D, the Assessing Officer is obliged to indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e primary onus is on the AO to demonstrate that claim of the assessee was incorrect. This is evident from a plain reading of the section itself as under: 14A. (1) [Notwithstanding anything to the contrary contained in this Act, 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. . .. . . 14. In the present case, it is evident from the satisfaction recorded by the AO of the assesses claim of expenses relating to exempt income not being correct, that it is merely based on general observations with no reference to the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
