Vivek Jain v. Acit, Circle 30(1)

PER B.C. MEENA, ACCOUNTANT MEMBER : This appeal filed by the assessee emanates from the order of CIT (Appeals)-XXV, New Delhi dated 28.12.2011 for the assessment year 2008-

2. The assessee is an individual. The return of income declaring loss of Rs.40,95,577/- was filed. The Assessing Officer made a disallowance of Rs.2,72,837/- u/s 14A of the Income-tax Act, 1961 by applying the Rule 8D of the Income-tax Rules. The assessee is having followed exempted income:- (a) Share income from Firm M/s Vaishali Pharmaceutical Rs.30005.69 u/s 10(2A); ITA No.1038/Del./2012 2 (b) Interest from PPF Rs.29,716.00 (c) Interest on Tax free Bonds Rs.18,850.00 (d) Dividend on shares of Indian Companies Rs.5,592.00 The assessee claimed that there is no expense incurred directly or indirectly for earning the exempted income. The assessee has also claimed that investment on which the exempted income has been earned were made out of own capital, hence there is no element of interest cost in earning the same. It is also claimed that share from the firm, interest on PPF and bonds did not call for any expenditure or extra efforts in earning the same. The grounds of appeal taken by the assessee before us read as under :-

1. Both the authorities below are not justified in disallowing the following exempted income U/S 14A of the Income-tax Act, 1961

a) Share Income from Firm M/s Vaishali Pharmaceuticals Rs.30005.69 u/s 10(2A); (b) Interest from PPF Rs.29,716/- (c) Interest on Tax free Bonds Rs.18,850/- (d) Dividend on shares of Indian Companies Rs.5,592/-

2. The learned Assessing Officer has erred in law and on facts in disallowing Rs.272837/- U/S 14A of the I.T. Act 1961. Whereas the total exempted Income comes to Rs.84163/-.

3. The exempted income is received in his individual capacity and this exempted income has no relation with the firm M/s. Vaishali Export Interworld where he is proprietor.

4. It is prayed to allow the whole disallowance and oblige.

3. We have heard both the sides on this issue. After hearing both the sides, we find that the assessment year under consideration is 2008-09. Therefore, the provisions of rule 8d are applicable as has been held by Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. ITA No.1038/Del./2012 3 vs. DCIT (2010) 328 ITR 81 (Bom.). However, the recent decision of Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT [2011] 203 Taxmann 364 (Delhi) wherein the Hon'ble High Court in paras 41 & 42 has held as under :-

41. sub-section (2) of section 14a, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with such method as may be prescribed. Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.

42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14a and rule 8d would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the ITA No.1038/Del./2012 4 assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:- The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment. In this case, the assessee claims that no expenditure has been made to earn the exempted income. In such a situation, Assessing Officer has to verify the correctness of the claim and if not found in order then apply the rule 8d. no ita no.1038/del./2012 5 such exercise has been done. In view of these facts and circumstances, we restore the issue to the file of the Assessing Officer to decide in view of the decision of Hon'ble jurisdictional High Court, cited supra.

4. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in open court on this 14th day of September, 2012. Sd/- sd/- (RAJPAL YADAV) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated the 14th day of September, 2012 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-XXV, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.