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Deputy Commissioner Of Income-Tax, Central Circle-Xxvii, Kolkata v. Rei Agro Ltd. .
Factual and Procedural Background
This appeal by revenue arises from an order of the Commissioner of Income Tax (Appeals), Central-II, Kolkata in Appeal No. 300.CC-XXVII/CIT(A)C-II/11–12 dated 26.09.2012. Assessment was framed by the Assistant Commissioner of Income Tax (ACIT), Central Circle-XXVII, Kolkata under section 143(3) of the Income-tax Act, 1961 for Assessment Year 2009–10 vide assessment order dated 31.10.2011.
During assessment, the Assessing Officer (AO) noted that the assessee earned dividend income of Rs. 15,53,375 which was claimed as exempt under section 10(34). The AO asked the assessee to produce details of expenditure incurred in earning this dividend. The assessee replied that no expenditure had been incurred, that no new investments or borrowings were made to earn the dividend, and that no interest was paid on investments. Unsatisfied with the reply, the AO applied Rule 8-D of the Income-tax Rules, 1962 and computed a disallowance (the assessment records show adoption of Rs. 9,637 as direct expenses and further computation under Rule 8-D leading to a total disallowance invoked under section 14-A read with Rule 8-D).
The assessee appealed to the CIT(A), who deleted the disallowance. Revenue appealed to the Tribunal contesting the deletion, raising two grounds challenging the CIT(A)'s deletion of the section 14-A disallowance computed under Rule 8-D(2)(iii) and asserting that the AO had carried out necessary examination and note-sheet recordings before invoking section 14-A with Rule 8-D(2)(iii).
Legal Issues Presented
- Whether the Commissioner of Income Tax (Appeals) erred in deleting the disallowance made by the AO under section 14-A read with Rule 8-D(2)(iii) of the Income-tax Rules, 1962.
- Whether the AO was entitled to invoke section 14-A read with Rule 8-D(2)(iii) without recording satisfaction after examination of the assessee's accounts and without giving cogent reasons, as contended by Revenue.
Arguments of the Parties
Appellant (Revenue) / AO
- Revenue contended that the CIT(A) erred in deleting the disallowance made under section 14-A read with Rule 8-D(2)(iii) and that the AO had done necessary examination and groundwork (evident from note-sheet recordings) before invoking the provisions.
- Before the Tribunal, the Senior Departmental Representative relied on the assessment order (the AO's order) as the basis for the department's stance.
Respondent (Assessee)
- The assessee asserted that no expenditure had been incurred to earn the dividend income: no new investment was made during the year, no interest was paid on investments, no loans or borrowed funds were taken to finance the investments and investments were made out of own funds.
- The assessee challenged the AO's application of Rule 8-D on the basis that the AO did not demonstrate any expenditure incurred, and therefore the disallowance under section 14-A was not sustainable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court in this Opinion |
|---|---|---|
| J.K. Investors (Bombay) Ltd. v. ACIT (ITA No. 7858/Mum/2011, AY 2008–09) dated 13.03.2013 | Applied to the factual issue of whether AO can invoke Rule 8-D without first recording satisfaction about the correctness of assessee's claim. | The Tribunal followed this coordinate bench decision and relied on it to uphold the CIT(A)'s deletion of the disallowance because the AO did not record requisite satisfaction or demonstrate expenditure. |
| Godrej & Boyce Mfg. Co. Ltd. v. DCIT (328 ITR 81) | Held that sub-sections (2) and (3) of section 14-A and Rule 8-D incorporate safeguards: AO must be objectively satisfied (having regard to accounts) before applying the prescribed method; Rule 8-D was considered prospective in some contexts. | Cited for the principle that the AO must first cross the threshold of dissatisfaction with the assessee's claim before applying Rule 8-D, and for the view on prospective applicability of Rule 8-D in certain circumstances. |
| Maxopp Investment Ltd. v. Commissioner of Income-Tax, New Delhi (247 CTR 162) | Explained that AO must record dissatisfaction with the correctness of assessee's claim (with regard to accounts) before determining expenditure under section 14-A(2); sub-section (3) applies where assessee claims no expenditure. | Quoted to support the requirement that AO must record satisfaction/dissatisfaction and give cogent reasons before invoking Rule 8-D; used to frame the statutory sequence for applying Rule 8-D. |
| CIT v. Walfort Share & Stock Brokers Pvt. Ltd. (326 ITR 1 (SC)) | Principle that to attract section 14-A there must be a proximate cause / proximate relationship between expenditure and the tax-exempt income. | Referenced (via Maxopp and subsequent tribunal decisions) for the requirement of proximate relationship and that disallowance requires a demonstrable link between expenditure and exempt income. |
| CIT v. Hero Cycles Ltd. (323 ITR 518 (P&H)) | Held that disallowance under section 14-A cannot stand where it is found that for earning exempt income no expenditure was incurred. | Relied upon to support the Tribunal's conclusion that where no expenditure was incurred in relation to exempt income, disallowance under section 14-A is not sustainable. |
| Justice Sam P. Bharucha v. Addl. CIT (ITA No. 3889/Mum/2011 dated 25.07.2012) | Explained that apportionment under s.14-A applies where expenditure relates to composite/indivisible activities; if actual expenditure is determinable or none incurred, apportionment has no application; requirement of a live nexus. | Used to affirm that where the assessee demonstrates that claimed expenses relate to taxable activity or that no expenditure was incurred for exempt income, provisions of s.14-A cannot be applied without a live nexus. |
| Shri Pawan Kumar Parameshwar Lal v. ACIT (Tribunal) | Illustrated deletion of s.14-A disallowance where investments were personal, separate books maintained and no correlation between business expenditure and personal dividend income. | Referenced to support deletion of disallowance where AO had not shown that business expenditures were attributable to earning exempt income; emphasized procedural correctness before applying Rule 8-D. |
| Auchtel Products Ltd. (Tribunal) | Held that AO must verify and reach satisfaction on the correctness of assessee's claim before invoking Rule 8-D; computing disallowance under Rule 8-D is contingent on AO's recorded dissatisfaction. | Cited to reinforce that AO erred in proceeding straight to computation under Rule 8-D without first examining and recording view on assessee's claim. |
| Relaxo Footwears Ltd. v. Addl. CIT ((2012) 50 SOT 102) | AO must consider the assessee's claim of no expenditure; cannot straightaway compute disallowance under Rule 8-D based on presumption. | Applied to hold that the AO in the present case did not consider the assessee's claim and wrongly proceeded to compute disallowance under Rule 8-D. |
| Priya Exhibitors (P) Ltd v. ACIT ((2012) 54 SOT 356) | Reiterated that AO must first determine correctness of assessee's claim with regard to expenditure or no expenditure, having regard to accounts, before applying Rule 8-D. | Used to support the Tribunal's conclusion that Rule 8-D cannot be invoked without examining and recording satisfaction about the assessee's claim. |
Court's Reasoning and Analysis
The Tribunal proceeded by examining (a) the assessment record and the AO's action, (b) the assessee's contemporaneous replies to the AO, and (c) the established jurisprudence on the sequence and conditions for invoking section 14-A and Rule 8-D.
Step-by-step analysis as stated in the opinion:
- Fact-finding: The AO recorded that dividend income of Rs. 15,53,375 was claimed as exempt and asked for details of expenditure; the assessee replied that no expenditure was incurred, no loans were taken, and investments were from own funds. The AO, however, was not convinced and applied Rule 8-D to compute and make a disallowance.
- Legal threshold: The Tribunal reviewed authoritative decisions (Bombay High Court, Delhi High Court, Supreme Court and coordinate benches) explaining that section 14-A(2) conditions a determination of expenditure on the AO being "not satisfied" with the correctness of the assessee's claim after having regard to the accounts. Rule 8-D implements that method, but its operation is contingent on the AO first reaching and recording the required dissatisfaction with reasons.
- Application to facts: The Tribunal found that the AO had not brought forward evidence proving any expenditure incurred relating to the dividend income, had not examined the assessee's accounts in a manner that led to a recorded dissatisfaction, and had proceeded straightaway to apply Rule 8-D (including adoption of a presumption for average value of investment) without the prerequisite examination and recording of reasons.
- Reliance on precedent: The Tribunal relied on several consistent authorities (including J.K. Investors, Godrej & Boyce, Maxopp, Justice Sam P Bharucha, Relaxo, Priya Exhibitors, and others) that uniformly instruct that Rule 8-D may be applied only after the AO records cogent reasons showing he is not satisfied with the assessee's claim regarding incurrence (or non-incurrence) of expenditure and that disallowance is not automatic or presumptive.
- Conclusion of law: Given the AO's failure to examine and record satisfaction/dissatisfaction and the absence of any evidence proving expenditure was incurred to earn the exempt dividend, the Tribunal concluded that no disallowance under section 14-A was called for in the circumstances of the case.
Holding and Implications
Holding: The Tribunal affirmed the CIT(A)'s order and dismissed the Revenue's appeal. The core ruling is: DISMISSED.
Immediate implications (as stated in the opinion):
- The disallowance made by the AO under section 14-A read with Rule 8-D (computed in the assessment order) is deleted because the AO did not examine the accounts to record dissatisfaction and did not produce evidence of expenditure incurred to earn the exempt dividend income.
- The Tribunal emphasized the procedural and substantive requirement that Rule 8-D can be invoked only after the AO, having regard to the assessee's accounts, records that he is not satisfied with the correctness of the assessee's claim regarding expenditure (or no expenditure). Absent such recorded satisfaction with reasons, Rule 8-D cannot be mechanically applied.
- The decision follows and applies existing authorities rather than laying down a novel principle; therefore, the ruling upholds prior jurisprudence requiring AO's recorded dissatisfaction and cogent reasons before invoking the prescribed method under section 14-A(2) (Rule 8-D).
Note: This summary is strictly confined to the material and holdings contained in the provided tribunal opinion. No information has been invented or inferred beyond what appears in the opinion.
Shri Mahavir Singh, J.M:— This appeal by revenue is arising out of order of CIT(A), Central-II, Kolkata in Appeal No. 300.CC-XXVII/CIT(A)C-II/11–12 dated 26.09.2012 Assessment was framed by ACIT, Central Circle-XXVII, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2009–10 vide his order dated 31.10.2011
2. The only issue in this appeal of revenue is against the order of CIT(A) deleting the addition made by AO by invoking the provisions of section 14-A read with Rule 8-D(2)(iii) of the I.T Rules, 1962. For this, revenue has raised following two grounds:
“1. That on the facts and in the circumstances of the case and in law the CIT(A)erred in deleting the disallowance made u/s. 14-A of the Income-tax Act, read with Rule 8-D(2)(iii) of the I.T Rules.
2. That on the facts in the circumstances of the case the CIT(A) erred in deleting the disallowance made u/s. 14-A of the Income-tax Act, without appreciating the fact that before proceeding for inviting the provisions of section 14-A read with Rule 8-D(2)(iii) the AO has conducted necessary examination and ground work, which are evident from the recordings of note sheet.”
3. We have heard rival submissions and gone through facts and circumstances of the case. Brief facts leading to the above issue are that during the course of assessment proceedings AO noticed that assessee has earned dividend income of Rs. 15,53,375/- and claimed the same as exempt u/s. 10(34) of the Act. The AO required the assessee to furnish the details of expenditure incurred for earning this dividend income. The assessee in reply stated that no expenditure has been incurred to earn this dividend income because no new investment was made during the year and no interest at all is paid on the investments made for earning this dividend income. Further, it was clarified by the assessee that no loans were taken for making this investment for earning this dividend income. The AO was not convinced with the reply of the assessee and made disallowance simply by making calculation by applying Rule 8-D of the I.T Rules, 1962 as under:
“i) Direct expenses: In the P&L A/c the assessee has debited Rs. 9637/- as den charges which is identified as expenditure directly attributable to earning of such income. Therefore, this figure is adopted at Rs. 9637/-.
4. Aggrieved, assessee challenged the disallowance made by invoking the provisions of section 14-A read with Rule 8-D of the I.T Rules at Rs. 23,78,687/- before CIT(A). CIT(A) after considering the submissions of the assessee deleted the disallowance. Aggrieved, revenue is in appeal before us.
5. Before us, Ld. Sr. DR only relied on the assessment order. We find that the AO has not brought on record anything which proves that there is any expenditure incurred towards earning of this dividend income. The assessee before us also contended that no loans or borrowed funds were taken for making investment in shares. The assessee contended that it has enough own funds to make investment in shares and investment in shares was made only out of its own funds. This issue is covered by the decision of Mumbai Tribunal in the case of J.K Investors (Bombay) Ltd. v. ACIT in ITA No. 7858.Mum/2011, AY 2008–09 dated 13.03.2013, wherein it has been held as under:
11. We have heard the arguments of the parties and have perused the material placed before us. The issue as carved out by the AR is with respect to Rs. 10,000 only, but on the contrary, the issue before us is on the applicability of Rule 14-A and computation of disallowance as per Rule 8-D. The relevant portion read out by the AR from the decision in the case of Godrej & Boyce Mfg. Co. Ltd v. DCIT (supra) in Para 70 of the order pertains to the correctness of computation of disallowance and giving valid reasons for such computation. The crux of argument of AR is with reference to Section 14(2) which is as under:
“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 AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act”.
The words that need reference in the section are “if AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim…” means that before going to the computation, AO has to cross the barrier of the satisfaction with the correctness of the claim, then AO can be permitted to straightaway apply the computation under Rule 8-D.
12. Thus the issue in this appeal is with reference to invoking of provisions of section 14-A(2) and Rule 8-D. The Hon'ble Bombay High Court while upholding the constitutional validity of the section 14-A and Rule 8-D has this to observe with reference to sub section 2 & 3 of section 14-A:
“Sub-sections (2) and (3) of section 14-A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14-A. Sub-rule (1) of Rule 8-D of the Income-tax Rules, 1962, has also incorporated the essential requirements of subsection (2) of section 14-A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)”.
(emphasis supplied).
13. The same opinion was expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd…. v. Commissioner Of Income-Tax, New Delhi 247 CTR 162 wherein reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd 326 ITR 1 (SC) and the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Company Ltd v. DCIT (328 ITR 81). The relevant portions of the judgment of Hon'ble Delhi High Court are as under:
29. Sub-section (2) of Section 14-A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only 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 the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14-A. Subsection (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14-A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8-D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.
Rule 8-D.
30. As we have already noticed, sub-section (2) of Section 14-A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is — “such method as may be prescribed”. We have already mentioned above that by virtue of Notification No. 45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8-D in the said Rules. The said Rule 8-D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8-D. We may observe that Rule 8-D(1) places the provisions of section 14-A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14-A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8-D of the said Rules.
31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8-D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8-D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of assessee, on the first day and the last day of the previous year, It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14-A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects — (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8-D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above, and, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken.
41. Sub-section (2) of section 14-A, 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 14-A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14-A(1) [as it now stands] as also in its initial avatar as section 14-A. 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 14-A, even prior to the introduction of sub-sections (2) and (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 14-A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.
14. The Hon'ble Punjab & Haryana High Court in the case of CIT v. Hero Cycles Ltd 323 ITR 518 (P&H) has also held that disallowance under section 14-A could not stand where it was found that for earning exempted income no expenditure has been incurred:
“Held - dismissing the appeal, that the expenditure on interest was set off against the income from interest and the investment in the shares and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14-A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14-A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14-A, could not be accepted. Disallowance under section 14-A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14-A could not stand. Consequently, the disallowance was not permissible.
15. The Coordinate Bench in the case of Justice Sam P Bharucha v. Addl. CIT in ITA No. 3889.Mum/2011 dated 25.07.2012 has analyzed similar issue and came to the following conclusion:
“5 We have considered the rival submissions as well as relevant material on record. Section 14-A has within it implicit notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible activities in which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14 A has no application. The objective of section 14-A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in, 326 ITR 1 that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income.
5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it was for the assessing officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of total income and if so to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14-A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14-A merely because some tax exempt income is received by the assessee.
5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. The Assessing Officer has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words when the assessing officer has not pointed out that certain expenditure is not incurred for earning the professional income; but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14-A cannot be applied.
5.3 In the case of Shri Pawan Kumar Parameshwar Lal v. ACIT (supra) this tribunal has considered and decided an identical issue in Para 4 as under:
“4. After hearing the assessee in person and arguments of the learned D.R we are of the opinion that no disallowance is called for under section 14-A. Obviously the assessee is maintaining separate books of account for purpose of business and these investments are in his personal capacity. The A.O also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this, we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. In view of this, we are of the opinion that estimation of expenditure of Rs. 20,000/- out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of above nature. In view of this disallowance so made under section 14-A of Rs. 20,000/- is deleted. Not only that the CIT(A) directed the A.O to consider the allowance invoking Rule 8-D. The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT 328 ITR 81 has considered Rule 8-D to be applicable prospective and since the assessment year involved is before the introduction of sub section (2) & (3) of section 14-A, there is no question of disallowing the amounts invoking Rule 8-D. Therefore, the CIT(A)'s direction on this is set aside and the additions so made by the A.O in the computation of business income is deleted. Ground is considered allowed.”
5.4 Similarly in case of Auchtel Products Ltd (supra), it was held by this Tribunal in Para 15 has under:
“15. A bare perusal of the above provisions disallowable as per Rule 8-D, if he, “is not satisfied with the correctness of the claim of the assessee” in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8-D if he is not satisfied with the correctness of the assessee's claim. To put it simply, the further disallowance u/s. 14-A is called for when the AO is not satisfied with the assessee's claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8-D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8-D. From the assessment order, it is observed that the AO simply kept the assessee's submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule 8-D is automatic irrespective of the genuineness of the assessee's claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the AO. The correct sequence, in our considered opinion, for making any disallowance u/s. 14-A is to, firstly, examine the assessee's claim of having incurred some expenditure or no expenditure in relation to exempt income, If the AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8-D. It is only when the AO is not satisfied with the correctness of the claim of assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8-D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s. 14-A as per Rule 8-D without rendering any opinion on the correctness or otherwise of the assessee's claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to re-compute disallowance, if any, in accordance with our above observations after duly examining the assessee's claim in this regard.”
6. In view of the above discussion and facts and circumstances of the case, we are of the considered opinion that no disallowance under section 14-A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income.
16. Similar views were also expressed by the Coordinate Benches in the case of Relaxo Footwears Ltd, v. Addl. CIT (2012) 50 SOT 102 and Priya Exhibitors (P) Ltd v. ACIT (2012) 54 SOT 356. In the case of Relaxo Footwears Ltd, it was held as under:
“The Assessing Officer should have considered the claim of the assessee that no expenditure has been incurred in relation to earning the exempt income. If the claim was not found to be in consonance with the facts on record, it could have been rejected and disallowance could have been made as per Rule 8-D. However, it is found that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8-D. The Commissioner (Appeals) made an assumption that whenever exempt income is earned there will be some expenditure incurred in relation thereto. Such presumption cannot form the basis for making disallowance under Rule 8-D.”
17. In the case of Priya Exhibitors (P) Ltd v. ACIT (2012) 54 SOT 356 it was held as under:
“From the careful study of the observations made by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), it is apparent that first the Assessing Officer has to determine the claim of the assessee regarding expenses which neither the Assessing Officer nor the Commissioner (Appeals) has done in the instant case. In fact, the said decision goes against the department itself in so far as their Lordships has held that the Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The Legislature directs him to follow Rule 8-D only where the Assessing Officer is not satisfied with the claim of assessee.”
18. After considering the principles laid down by various judgments, it is imperative that the Assessing Officer can invoke Rule 8-D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Therefore, it is all the more necessary that AO has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8-D. No such examination was made or satisfaction was recorded by AO in this case. It was noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8-D on the presumption that port folio management involves at least 2% of charges. Disallowance under section 14-A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14-A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs. 1,55,44,610. Assessee is a hundred crore turnover company. AO has not examined any expenditure claimed in P& L account so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8-D cannot be invoked directly without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible. We therefore, allow the ground of appeal.”
6. We find from the facts of the above case that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8-D of the Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8-D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K Investors (Bombay) Ltd., supra, we uphold the order of CIT(A). This ground of appeal of revenue is dismissed.
7. In the result, the appeal of the revenue is dismissed.
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