ORDER

Akil Kureshi, J. - This appeal is filed by the assessee to challenge the judgment of the Income Tax Appellate Tribunal dated 25.11.2016. Following questions have been presented for our consideration.

2. Though three questions are framed, the issue is common namely of disallowance of a sum of Rs. 9,63,355/- made by the Assessing Officer and confirmed up to the level of the Income Tax Appellate Tribunal in terms of Section 14A of the Income-tax Act, 1961 read with Rule 8D(ii) of the Income Tax Rules.

3. For the assessment year 2009-10, the assessee had filed the return of income in which the assessee had shown dividend income of Rs.41.20 lakhs (rounded off) and long-term capital gain of Rs.1.28 crores (rounded off) as income exempt from tax. To earn such income, the assessee had made investment of Rs.23.62 crores (rounded off) as on 31.03.2009. The assessee had showed Nil expenditure for earning such tax exempt income. The Assessing Officer was not convinced about this claim of the assessee and therefore issued a show-cause notice to the assessee why disallowance under Section 14A of the Act read with Rule 8D of the Rules should not be made. The assessee replied to the show-cause notice under letter dated 17.10.2011 contending inter alia that the assessee had invested its own funds. No borrowed funds were utilized. The question of investment out of borrowed funds, therefore, does not arise.

4. The Assessing Officer did not accept the explanation of the assessee. The main contention of the assessee was with respect to the interest expenditure. He noted that the assessee had not referred to any indirect expenditure. He was of the opinion that in such investment activity there would be certain expenditure involved. Out of the total expenditure of the assessee for its business, a portion would be included towards expenditure for such investment activity and for earning tax exempt income such as cost of interest, administrative and management associated charges etc. He was also of the opinion that the assessee would have incurred administrative expenditure such as documentation, salaries of employees, handling the investment portfolio, administrative overheads like stationery, telephone, computer, office equipments, vehicles etc which came to Rs. 9.75 lakhs which he disallowed. He was, therefore, of the opinion that the assessee had incurred direct or indirect expenditure for earning such income which was claimed to be exempt from payment of tax. He also noted that the assessee merely contended that no borrowed funds were diverted but failed to establish that the assessee had sufficient interest free funds on the date of investment. On these grounds, the Assessing Officer rejected the assessee's explanation and proceeded to compute the expenditure to be disallowed in terms of Rule 8D of the Rules.

5. The matter was carried in appeal. The Commissioner (Appeals) confirmed the view of the Assessing Officer upon which the assessee approached the Tribunal. The Tribunal by the impugned judgment rejected the appeal making following observations:

"8. We have carefully considered the rival submissions and gone through the orders of the authorities below. The solitary issue for adjudication is correctness of the disallowance under section 14A of the Act. We note that the assessee holds substantial investments which is pegged at Rs.41.92 crores as on 31/03/2009 and Rs.35.16 crores as on 31/03/2008. We simultaneously note from the 'statement of facts' filed before the CIT (A) that assessee in its own admission has admitted that one of the Directors used to devote one hour per week for the administration of the investment. Nonetheless, the assessee has not recorded any amount attributable to the earning of tax-free income by way of dividend.

9. We do not find any rationale in the argument put forth on behalf of the assessee that no expenditure has been incurred in relation to income which does not form part of the total income. It is an common knowledge that holding of such investments would entail ordinary expenses like DEMAT charges and engagement of senior management. We also notice that there are several instances of change in the investment during the year qua the investments held in the previous year. Naturally, the Board and Senior Management has devoted time and attention in the decision-making process. Therefore, the contention of the assessee about NIL administrative expenditure for holding the investment stands belied in the facts of the case. In the event, the Assessee claims that no expenditure has been incurred by him in relation to exempt income, the case gets covered by section 14A(3) of the Act. Section 14A(3) of the Act specifically excludes applicability of section 14A(2) and shifts the burden entirely on Assessee to establish absence, if any, of expenditure disallowable under section 14A of the Act. Besides, Rule 8D(2)(iii) of the IT Rules, 1962 has been enacted for such eventualities where it is not possible to allocate the indirect expenditure towards administration, etc. with any scientific accuracy. In the circumstances, we do not see any logic in the arguments of the assessee insofar as disallowance under Rule 8D(2) (iii) is concerned. However, insofar as disallowance of interest towards interest is concerned, we find that the averment made on behalf of the assessee that the own capital together with accumulated reserves are in excess of corresponding investment remains unrebutted. Therefore, in view of the long line of the judicial precedent on the issue, the disallowance towards proportionate interest under Rule 8D(2)(ii) is not sustainable in the facts. As a result, order of the CIT (A) is partially allowed in terms of our observations noted above."

6. Learned counsel Shri Hemani for the appellant contended that the Assessing Officer committed serious error in applying the formula contained in sub-rule (2) of Rule 8D of the Rules without recording his satisfaction rejecting the assessee's accounts reflecting that no expenditure was incurred for earning such tax exempt income. He submitted that mere general observations that some expenditure must have been incurred would not be sufficient and unless the Assessing Officer makes specific reference to the expenditure actually incurred, neither Section 14A nor Rule 8D would apply. In this context, counsel relied on the judgment of the Supreme Court in case of Godrej & Boyce Mfg Co. Ltd. v. Dy. CIT [2017] 394 ITR 449/247 Taxman 361/81 taxmann.com 111 in which finding that in the earlier years the issue of the expenditure sought to be disallowed had actually been incurred in earning dividend income was already decided in favour of the assessee and therefore in the present order the Assessing Officer could not have taken a different view. Reliance was also placed on a decision of the Division Bench of Delhi High Court in case of Maxopp Investment Ltd…. v. Commissioner Of Income-Tax, New Delhi [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390 in which it was observed that what is in contemplation of Section 14A of the Act is the actual expenditure incurred in relation to or in connection with the earning. Exempt income has a corollary. If no expenditure is incurred, no disallowance can be made.

7. With the observations made by the courts in the above noted judgments, there can be little quarrel. What Section 14A of the Act envisages is disallowance of expenditure incurred by an assessee in relation to income which does not form part of the total income. This flows from sub-section (1) of Section 14A. Sub-section (2) of Section 14A permits the Assessing Officer to determine such amount of expenditure if he 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. Sub-section (3) of Section 14A clarifies that the provision of sub-section (2) would apply also in relation to a case where when the assessee claims that no expenditure has been incurred in relation to the income which does not form part of the total income.

8. To give effect to the provision of Section 14A and in particular sub-section (2) thereof, Rule 8D of the Rules provides the method for determining the amount of expenditure in relation to the income not includable in the total income. Sub-rule (1) echoes the provision of sub-sections (2) and (3) of Section 14A where it provides that if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the expenditure or the claim made is that no expenditure has been incurred in relation to the income which does not form part of the total income, he would determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). Sub-rule (2) of Rule 8D prior to its amendment with effect from 02.06.2016 provided a formula to apportion the expenditure in connection with the tax free income. Section 14A as well as Rule 8D require the Assessing Officer to arrive at a satisfaction that the claim of the expenditure made by the assessee is not correct. It is only then he can apply the formula under sub-rule (2) of Rule 8D. However, these statutory provisions do not require that such satisfaction must be arrived at in a particular manner. As long as there is sufficient material to enable the Assessing Officer to arrive at such a satisfaction and which is also recorded by him in the order of assessment, the requirements of the statute would be satisfied. In the present case, we have noted that the Assessing Officer has given detailed reasons for discarding the assessee's theory that to earn the assessable income the assessee incurred no expenditure whatsoever. The Tribunal confirmed such view. Decision of the Assessing Officer to apply the formula under Rule 8D was therefore correct. Tax appeal is accordingly dismissed.