Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: due date for vat payment :: TAX RATES - GOODS TAXABLE @ 4% :: articles on VAT and GST in India :: form 3cd :: ACCOUNTING STANDARDS :: ACCOUNTING STANDARD :: VAT Audit :: Central Excise rule to resale the machines to a new company :: ARTICLES ON INPUT TAX CREDIT IN VAT :: list of goods taxed at 4% :: empanelment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: cpt :: TDS :: VAT RATES
 
 
From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21
 CHAUDHARY SKIN TRADING COMPANY Vs. PR. COMMISSIONER OF INCOME TAX-21
  Sushila Devi vs. CIT (Delhi High Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 Deputy Director Of Income Tax Vs. Virage Logic International
 Commissioner Of Income Tax-3 International Taxation Vs. Virage Logic International India
 Pr. Commissioner Of Income Tax-06 Vs. Moderate Leasing And Capital Services Pvt. Ltd.
 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

COMMISSIONER OF INCOME TAX-VI Vs. TAIKISHA ENGINEERING INDIA LTD
January, 10th 2015
$~20 & 21

*     IN THE HIGH COURT OF DELHI AT NEW DELHI

                                   Date of Decision: 25th November, 2014

+     ITA 115/2014 & 119/2014

      COMMISSIONER OF INCOME TAX-VI
                                                               ..... Appellant
                          Through       Ms. Suruchi Aggarwal, Sr. Standing
                                        Counsel

                          versus

      TAIKISHA ENGINEERING INDIA LTD
                                                            ..... Respondent
                          Through       Mr. K.R.Manjani, Advocate

      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA
      HON'BLE MR. JUSTICE V. KAMESWAR RAO

      SANJIV KHANNA, J. (Oral)

      These two appeals by the Revenue under Section 260A of the Income

Tax Act, 1961 (Act` for short) relate to assessment years 2008 -09 and

2009-10.

2.    The issue raised by the Revenue in these appeals pertains to Section

14A of the Act and Rule 8D of the Income Tax Rules, 1962 (Rules` for

short) and disallowance of expenditure relating to exempt income.

3.    For the assessment year 2008-09, the respondent assessee had filed




ITA 115/2014 & 119/2014                                    Page 1 of 20
return declaring total taxable income of Rs.31,14,68,297/- and exempt

income of Rs.2,46,81,747/-. The assessee had voluntarily disallowed

expenditure of Rs.1,15,000/- under Section 14A of the Act, calculation for

which were submitted before the Assessing Officer by way of letter dated

2nd November, 2010. The Assessing Officer considered the reply and noted

that the voluntary disallowance did not fulfil the requirements of Section

14A of the Act read with Rule 8D of the Rules. No other reason was

indicated. Decision of the Bombay High Court in Godrej & Boyce Mfg. Co.

Ltd. vs. CIT [2010] 328 ITR 81 (Bom.) and the principles enunciated and

enumerated in the said decision were quoted. The Assessing Officer

recomputed the disallowance by applying Rule 8D of the Rules and

quantified the disallowance at Rs.42,59,540. As the assessee had himself

disallowed an amount of Rs.1,15,000/-, the balance amount of

Rs.41,44,540/- was added and the returned income enhanced.

4.    For the assessment year 2009-10, the assessee had filed return

declaring income of Rs.8,98,19,429/- and had voluntarily disallowed

Rs.2,76,194/- under Section 14A of the Act. The Assessing Officer noticed

that the assessee had earned exempt dividend income to the tune of

Rs.17,43,782/- and had declared long term capital gain, which was not




ITA 115/2014 & 119/2014                                Page 2 of 20
taxable. The Assessing Officer recorded that he had considered the reply to

justify the disallowance of Rs.2,76,194/-, but without any further elucidation

held that the disallowance did not fulfil the requirements of Section 14A of

the Act read with Rule 8D of the Rules. Disallowance by applying Rule 8D

of the Rules was computed at Rs.5,36,393/-. As the assessee had disallowed

Rs.2,76,194/- in the computation of income, the difference of Rs.2,60,199/-

was added and the returned income enhanced.

5.    Appeals were disposed of by the common order dated 26th March,

2012 by the Commissioner of Income Tax (Appeals) (CIT(A)`, for short),

who deleted the addition after referring to the following part of the written

submissions filed by the assessee in relation to the assessment year 2008-09:

      "Investment in Mutual Fund is made from current account
      in HDFC bank in which no interest is incurred. Investments
      were made out of surplus funds. Assessee deposited funds
      amounting to Rs. 28,7130,569.00 generated on sale of
      mutual fund during the F.Y. 2007-08 and funds amounting
      to Rs. 15,59,58,985.00 were used for acquiring the
      investment Which results into net surplus of Rs.
      13,11,71,584.00. In support of this we have already filed the
      details of funds realised on sale of mutual funds and
      deposited along with the details funds utilized for
      investment in current of HDFC bank. Also copy of the bank
      statement showing these transactions is already filed.
      "Assessee having interest free funds far in excess of amount
      invested in mutual funds, no disallowance could be made
      under section 14A because the interest expenditure was
      incurred in respect of the borrowing in cash credit limits




ITA 115/2014 & 119/2014                                   Page 3 of 20
      utilized for normal business purposes of the assessee and no
      part of the borrowed funds has been utilized by the assessee
      for making investment in the mutual funds. Rather on
      account of capital gain on sale of mutual funds, company
      generated surplus funds."

6.    He observed that the assessee had share capital of Rs.60,00,000/- and

Reserve & Surplus funds of Rs.53.19 crores as on 31 st March, 2008 and

share capital of Rs.60,00,000/- and Reserve and Surplus funds of Rs.41.49

crores as on 31st March, 2007. Therefore, no interest bearing funds had been

used for making investments, which had yielded tax free income like

dividends.

7.    In respect of assessment year 2009-10, similar findings were recorded

by the CIT(A), who observed that direct expenditure incurred by the

respondent assessee was Rs.643.26 as DEMAT charges and in respect of

interest income, he referred to the following explanation of the assessee:-

      Interest Clause (ii)
      Investment in Mutual Fund is made from current account
      in HDFC bank in which no interest is incurred. Investments
      were made out of surplus/own funds deposit earlier.
      Assessee deposited funds in HDFC current account
      amounting to Rs. 10,6715,425.00 generated on sale of
      mutual fund during the period October 07, March 2008 and
      Apr. 2008. Dividend amounting to Rs.57,90,120.00
      received during the F.Y. 2007-08 also invested. Total
      surplus/own funds available are Rs. 112505545.00 utilised
      by assessee for making investment in the A.Y. 2009-10.
      Details are enclosed "Exhibit-3".







ITA 115/2014 & 119/2014                                    Page 4 of 20
      Photocopy of the bank statement for the Exhibit no. 3 for
      the period 01.10.2007 to 08.04.2008 is enclosed showing
      funds deposited marked vide "Exhibit-4".
      Photocopy of the bank statement for the Exhibit no. 2 for
      the F.Y. 2008-09 is enclosed showing investment made
      marked vide "Exhibit-5".
      As explained above no interest bearing funds were used by
      the assessee for investment. Interest bearing funds were
      used by the assessee for doing normal business of the
      company. Assessee used surplus/own funds for the
      investment in mutual funds.
      As the assessee have interest free funds far in excess of
      amount invested in mutual funds. Therefore, no
      disallowance could be made under clause (ii) of section 14A
      because of the interest expenditure was incurred directly
      attributable to the business purpose. No part of the
      borrowed funds has been utilized by the assessee for making
      investment in mutual funds."
      14.2 The AR relied on the following case laws:
      · Sushma Kapoor 319 ITR 299 (Del.)
      · DCIT vs. Maruti udyog Ltd. 92 ITJ 987 (Del.)
      · Voltas Ltd. 125 ITJ 601 (Mum.) (Trb.)
      · Dishman Pharmaceuticals Ltd. vs. DCIT 45 SOT 37 (Ahd)
      (URO)
      15. I have gone through the assessment order and the
      detailed written submissions.
      The AO worked out disallowance of Rs. 5,36,393/- under
      Rule 8D(2)(ii). The AR has explained that no borrowed
      funds were utilized for making the investment. The issue
      has been examined in the earlier years and found that no
      disallowance is called for under Rule 8D(2)(ii).
      It is further seen that the disallowance under rule 8D(2)(iii)
      worked out to Rs. 2,76,194/- which was forgotten to be
      added by mistake. The AR has no objection for disallowing
      of Rs. 2,76,914/- which he has accepted in the assessment
      proceedings.
      Relief: 5,36,393/-
      Confirmed: 2,76,914/-




ITA 115/2014 & 119/2014                                   Page 5 of 20
      Accordingly Ground No.1 is partly allowed.
8.    The Income Tax Appellate Tribunal (Tribunal`, for short) by a

common order dated 27th September, 2013 has dismissed the appeals filed

by the Revenue. Rule 8D of the Rules it was held was applicable and the

issue related to computation under sub Rule (2) and the three sub-clauses.

Reference was made to clause (ii) of sub Rule (2) to Rule 8D of the Rules

and it has been held:-

      2.4. ... Only clause (ii) is involved in the present appeal.
      The AO considered the total interest paid by the assessee for
      allocating a sum of [Rs.] 36.76 lakh to the investments
      yielding exempt income. At the threshold it needs to be
      determined as to whether any interest expenditure can be
      attributed to the securities on which such exempt income
      was earned. The question of disallowance of such interest
      u/s 14A would arise only if some expenditure is said to have
      been incurred in relation to investment in such securities. In
      this regard, it is observed that the assessee made total
      investment of [Rs.] 6.33 crore in shares or securities
      resulting into exempt income. As against that share holder
      funds stood at [Rs.] 53.79 crore at the end of the year. Thus,
      it is evident that the amount invested in such shares or
      securities is far in excess of share holders' funds.
9.    Reference was made to the decision of the Delhi High Court in CIT

vs. Tin Box Co. [2003] 260 ITR 637 (Del) to hold that when the assessee

had sufficient funds and non interest funds were advanced to a sister

concern, no disallowance was justified. Further, the Bombay High Court in

CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.) had



ITA 115/2014 & 119/2014                                   Page 6 of 20
similarly held that when sufficient non interest funds were available for

investment then no disallowance of interest should be made. The Bombay

High Court had placed reliance on the decision of East India

Pharmaceutical Works Ltd. vs. CIT [1997] 224 ITR 624 (SC) to the effect

that if the assessee had sufficient non interest funds, then investment made

in shares and securities resulting in exempt income should not lead to

disallowance of interest expenditure, as there was no question of attributing

any interest to such investments. Lastly, reference was made to the decision

of the Gujarat High Court in CIT vs. Suzlon Energy Ltd. [2013] 354 ITR

630, to the same effect.

10.   Having heard the Counsel for the parties, we feel that the respondent

assessee is entitled to succeed on somewhat different grounds and reasons,

than those elucidated by the Tribunal.

11.   Section 14A of the Act is relevant and reproduced below:-

      14A. (1) 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




ITA 115/2014 & 119/2014                                  Page 7 of 20
      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.

      (3) The provisions of sub-section (2) shall also apply in
      relation to a case where an assessee claims that no
      expenditure has been incurred by him in relation to income
      which does not form part of the total income under this Act.

      Provided that nothing contained in this section shall
      empower the Assessing Officer either to reassess under
      section 147 or pass an order enhancing the assessment or
      reducing a refund already made or otherwise increasing the
      liability of the assessee under section 154, for any
      assessment year beginning on or before the 1st day of April,
      2001.
Section 14A of the Act postulates and states that no deduction shall be

allowed in respect of expenditure incurred by an assessee in relation to

income which does not form part of the total income under the Act. Under

sub Section (2) to Section 14A of the Act, the Assessing Officer is required

to examine the accounts of the assessee and only when he is not satisfied

with the correctness of the claim of the assessee in respect of expenditure in

relation to exempt income, the Assessing Officer can determine the amount

of expenditure which should be disallowed in accordance with such method

as prescribed, i.e. Rule 8D of the Rules (quoted and elucidated below).

Therefore, the Assessing Officer at the first instance must examine the

disallowance made by the assessee or the claim of the assessee that no



ITA 115/2014 & 119/2014                                    Page 8 of 20
expenditure was incurred to earn the exempt income. If and only if the

Assessing Officer is not satisfied on this count after making reference to the

accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of

the Rules. Thus, Rule 8D is not attracted and applicable to all assessee who

have exempt income and it is not compulsory and necessary that an assessee

must voluntarily compute disallowance as per Rule 8D of the Rules. Where

the disallowance or nil` disallowance made by the assessee is found to be

unsatisfactory on examination of accounts, the assessing officer is entitled

and authorised to compute the deduction under Rule 8D of the Rules. This

pre-condition and stipulation as noticed below is also mandated in sub Rule

(1) to Rule 8D of the Rules.

12.   Rule 8D of the Rules, again for the sake of convenience, is

reproduced below:-

      8D. (1) 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 Act for such previous year, he shall
      determine the amount of expenditure in relation to such
      income in accordance with the provisions of sub-rule (2).
      (2) The expenditure in relation to income which does not




ITA 115/2014 & 119/2014                                    Page 9 of 20
      form part of the total income shall be the aggregate of
      following amounts, namely:--
             (i)           the amount of expenditure directly
             relating to income which does not form part of total
             income;
             (ii)          in a case where the assessee has incurred
             expenditure by way of interest during the previous
             year which is not directly attributable to any
             particular income or receipt, an amount computed in
             accordance with the following formula, namely :--
             A × B/C
             Where         A = amount of expenditure by way of
             interest other than the amount of interest included in
             clause (i) incurred during the previous year ;
                           B = the average of value of
             investment, income from which does not or shall not
             form part of the total income, as appearing in the
             balance sheet of the assessee, on the first day and the
             last day of the previous year ;
                           C = the average of total assets as
             appearing in the balance sheet of the assessee, on the
             first day and the last day of the previous year ;
             (iii)         an amount equal to one-half per cent of
             the average of the value of investment, income from
             which does not or shall not form part of the total
             income, as appearing in the balance sheet of the
             assessee, on the first day and the last day of the
             previous year.
      (3) For the purposes of this rule, the total assets shall
      mean, total assets as appearing in the balance sheet
      excluding the increase on account of revaluation of assets
      but including the decrease on account of revaluation of
      assets.
Sub Rule (1) categorically and significantly states that the Assessing Officer

having regard to the account of the assessee and on not being satisfied with

the correctness of the claim of expenditure made by the assessee or claim



ITA 115/2014 & 119/2014                                   Page 10 of 20
that no expenditure was incurred in relation to income which does not form

part of the total income under the Act, can go on to determine the

disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will

not come into operation until and unless the specific pre-condition in sub

Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in

unison and affirmatively record that the computation or disallowance made

by the assessee or claim that no expenditure was incurred to earn exempt

income must be examined with reference to the accounts, and only and when

the explanation/claim of the assessee is not satisfactory, computation under

sub Rule (2) to Rule 8D of the Rules is to be made.

13.   We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules

until and unless the Assessing Officer has first recorded the satisfaction,

which is mandated by sub Section (2) to Section 14A of the Act and sub

Rule (1) to Rule 8D of the Rules.

14.   The view and legal ratio expressed above is not being elucidated for

the first time. The Delhi High Court in Maxopp Investment Ltd. vs.

Commissioner of Income Tax [2012] 347 ITR 272, has observed:-

      Scope of sub-sections (2) and (3) of Section 14A
      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




ITA 115/2014 & 119/2014                                  Page 11 of 20
      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 14A.
      Sub-section (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 14A 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




ITA 115/2014 & 119/2014                                    Page 12 of 20
      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 8D 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 8D
      As we have already noticed, sub-section (2) of Section 14A
      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 of 2008, dated March 24, 2008,
      the Central Board of Direct Taxes introduced Rule 8D in the
      said Rules. The said Rule 8D 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 asses
      see; 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 8D.
      We may observe that Rule 8D(1) places the provisions of
      Section 14A(2) and (3) in the correct perspective. As we
      have already seen, while discussing the provisions of Sub-
      sections (2) and (3) of Section 14A, 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




ITA 115/2014 & 119/2014                                   Page 13 of 20
      in relation to income not includable in total income in the
      manner indicated in sub-rule (2) of Rule 8D of the said
      Rules.

      It is, therefore, clear that determination of the amount of
      expenditure in relation to exempt income under Rule 8D
      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 8D, 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 the 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 14A 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 8D. 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




ITA 115/2014 & 119/2014                                     Page 14 of 20
      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.

15.   Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co.

Ltd. versus Deputy Commissioner of Income Tax (2010) 328 ITR 81

(Bom.) had referred to Section 14(2) of the Act and observed:-

      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. The method, having regard to the
      meaning of the expression "prescribed" in section 2(33),
      must be prescribed by rules made under the Act. What
      merits emphasis is that the jurisdiction of the Assessing
      Officer to determine the expenditure incurred in relation to
      such income which does not form part of the total income, in
      accordance with the prescribed method, arises if the
      Assessing Officer is not satisfied with the correctness of the
      claim of the assessee in respect of the expenditure which the
      assessee claims to have incurred in relation to income which
      does not part of the total income. Moreover, the satisfaction
      of the Assessing Officer has to be arrived at, having regard
      to the accounts of the assessee. Hence, sub-section (2) does
      not ipso facto enable the Assessing Officer to apply the
      method prescribed by the rules straightaway without
      considering whether the claim made by the assessee in
      respect of the expenditure incurred in relation to income
      which does not form part of the total income is correct. The
      Assessing Officer must, in the first instance, determine
      whether the claim of the assessee in that regard is correct
      and the determination must be made having regard to the
      accounts of the assessee. The satisfaction of the Assessing
      Officer must be arrived at on an objective basis. It is only



ITA 115/2014 & 119/2014                                   Page 15 of 20
      when the Assessing Officer is not satisfied with the claim of
      the assessee, that the Legislature directs him to follow the
      method that may be prescribed. In a situation where the
      accounts of the assessee furnish an objective basis for the
      Assessing Officer to arrive at a satisfaction in regard to the
      correctness of the claim of the assessee of the expenditure
      which has been incurred in relation to income which does
      not form part of the total income, there would be no warrant
      for taking recourse to the method prescribed by the rules.
      For, it is only in the event of the Assessing Officer not being
      so satisfied that recourse to the prescribed method is
      mandated by law. Sub-section (3) of section 14A provides
      for the application of sub-section (2) also to a situation
      where the assessee claims that no expenditure has been
      incurred by him in relation to income which does not form
      part of the total income under the Act. Under the proviso, it
      has been stipulated that nothing in the section will empower
      the Assessing Officer, for an assessment year beginning on
      or before April 1, 2001, either to reassess under section 147
      or pass an order enhancing the assessment or reducing the
      refund already made or otherwise increasing the liability of
      the assessee under section 154.
16.   Equally illuminating are the following observations in Godrej and

Boyce Mfg. Co. Ltd. (supra)

      ... However, if the assessee does not maintain separate
      accounts, it would be necessary for the Assessing Officer to
      deter-mine the proportion of expenditure incurred in relation
      to the dividend business (i.e., earning exempt income). It is
      for exactly such situations that a machinery/method for
      computing the proportion of expenditure incurred in relation
      to the dividend business has been provided by way of
      section 14A(2)/(3) and rule 8D.
17.   More important and relevant for us are the observations in Godrej and

Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction



ITA 115/2014 & 119/2014                                    Page 16 of 20
being recorded by the Assessing Officer with reference to the accounts

under Section 14(2) of the Act and Rule 8D(1) of the Rules. It was

observed:-

      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. When a statute postulates the satisfaction of the
      Assessing Officer "Courts will not readily defer to the
      conclusiveness of an executive authority's opinion as to the
      existence of a matter of law or fact upon which the validity
      of the exercise of the power is predicated". (M. A. Rasheed
      v. State of Kerala [1974] AIR 1974 SC 2249*). A decision
      by the Assessing Officer has to be arrived at in good faith on
      relevant considerations. The Assessing Officer must furnish
      to the assessee a reasonable opportunity to show cause on
      the correctness of the claim made by him. In the event that
      the Assessing Officer is not satisfied with the correctness of
      the claim made by the assessee, he must record reasons for
      his conclusion. 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 14A. As
      we shall note shortly hereafter, sub-rule (1) of rule 8D has
      also incorporated the essential requirements of sub-section
      (2) of section 14A before the Assessing Officer proceeds to
      apply the method prescribed under sub-rule (2).




18.   It is in this context we feel that the findings recorded by the CIT(A)

and the Tribunal are appropriate and relevant. The clear findings are that the




ITA 115/2014 & 119/2014                                   Page 17 of 20
assessee had sufficient funds for making investments in shares and mutual

funds. The said findings coupled with the failure of the Assessing Officer to

hold and record his satisfaction clinches the issue in favour of the

respondent assessee and against the Revenue. The self or voluntary

deductions made by the assessee were not rejected and held to be

unsatisfactory, on examination of accounts. Judgments in Tin Box Co.

(supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd.

(supra) and East India Pharmaceutical Works Ltd. (supra) would be

relevant if the satisfaction of the Assessing Officer is in issue, and such

question of satisfaction is with reference to the accounts.

19.   However, the decisions relied upon by the Tribunal in the case of Tin

Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy

Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not

be now applicable, if we apply and compute the disallowance under Rule 8D

of the Rules. The said Rule in sub Rule (2) specifically prescribes the mode

and method for computing the disallowance under Section 14A of the Act.

Thus, the interpretation of clause (ii) to sub Rule (2) to Rule 8D of the Rules

by the CIT(A) and the Tribunal is not sustainable. The said clause expressly

states that where the assessee has incurred expenditure by way of interest in




ITA 115/2014 & 119/2014                                       Page 18 of 20
the previous year and the interest paid is not directly attributable to any

particular income or receipt then the formula prescribed would apply. Under

clause (ii) to Rule 8D(2) of the Rules, the Assessing Officer is required to

examine whether the assessee has incurred expenditure by way of interest in

the previous year and secondly whether the interest paid was directly

attributable to particular income or receipt. In case the interest paid was

directly attributable to any particular income or receipt, then the interest on

loan amount to this extent or in entirety as the case may be, has to be

excluded for making computation as per the formula prescribed. Pertinently,

the amount to be disallowed as expenditure relatable to exempt income,

under sub Rule (2) is the aggregate of the amount under clause (i), clause (ii)

and clause (iii). Clause (i) relates to direct expenditure relating to income

forming part of the total income and under clause (iii) an amount equal to

0.5% of the average amount of value of investment, appearing in the balance

sheet on the first day and the last day of the assessee has to be disallowed.

20.   However, in the present case we need not refer to sub Rule (2) to Rule

8D of the Rules as conditions mentioned in sub Section (2) to Section 14A

of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied

and the Assessing Officer erred in invoking sub Rule (2), without




ITA 115/2014 & 119/2014                                     Page 19 of 20
elucidating and explaining why the voluntary disallowance made by the

assessee was unreasonable and unsatisfactory. We do not find any such

satisfaction recorded in the present case by the Assessing Officer, before he

invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation.

Therefore, the respondent assessee would succeed and the appeal should be

dismissed.

      The appeals are accordingly dismissed with no order as to costs.



                                                     SANJIV KHANNA, J.


                                                 V. KAMESWAR RAO, J.
NOVEMBER 25, 2014/km




ITA 115/2014 & 119/2014                                  Page 20 of 20

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
SEO Services SEO LLC e-boost Search Engine Optimization Services Internet Marketing Services Website Placement Services On-site Webs

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions