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ACIT, Circle II, Faridabad. Vs. M/s. N.H.P.C. Limited, NHPC Complex, Sector 33, Faridabad.
August, 28th 2015
          IN THE INCOME TAX APPELLATE TRIBUNAL
               (DELHI BENCH `E' : NEW DELHI)

     BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
                           and
           SHRI A.T. VARKEY, JUDICIAL MEMBER

                         ITA No.424/Del./2013
                    (ASSESSMENT YEAR : 2009-10)

ACIT, Circle II,                vs.           M/s. N.H.P.C. Limited,
Faridabad.                                    NHPC Complex,
                                              Sector 33,
                                              Faridabad.

                                              (PAN : AAACN0149C)

       (APPELLANT)                                  (RESPONDENT)

             ASSESSEE BY : S/Shri Ved Jain, Ashish Goel and
                              Pranjal Shrivastava, Advocates
             REVENUE BY : None

                   Date of Hearing       : 23.07.2015
                   Date of Pronouncement : 26.08.2015

                                       ORDER

PER A.T. VARKEY, JUDICIAL MEMBER :

       This appeal, at the instance of the revenue, is directed against the

order of the Commissioner of Income-tax (Appeals), Faridabad dated

29.10.2012 for the assessment year 2009-10.

2.     The brief facts of the case are that the assessee company is a Public

Sector Undertaking and has been engaged in the business of construction

of Hydro Power Projects, Generation and Distribution of Electricity and

Consultancy Services. The return of income declaring NIL income after
                                           2                      ITA No.424/Del./2013


claiming deduction to the extent of Rs.3,63,99,65,437/- u/s 80IA of the

Income-tax Act, 1961 (hereinafter `the Act') was E-filed by the assessee

on 26.09.2009. The book profit under the provisions of section 115JB of

the Act was, however, declared at Rs.1141,51,66,920/-. Thereafter, the

assessee filed a revised return on 30.03.2010 revising book profit at

Rs.1115,30,68,920/- u/s 115JB of the Act. The case was selected for

scrutiny through CASS and a notice u/s 143(2) of the Act was issued on

19.08.2010. In the assessment order, the AO has made several additions

and disallowances while computing the income under the normal,

provisions as well as under section 115JB of the, Act, which have been

challenged by the assessee before the first appellate authority. The ld. CIT

(A) allowed the appeal of the assessee.

3.    Aggrieved, the revenue is in appeal before us.

4.    The revenue has taken the following grounds of appeal :-

      "(A) The order of the Ld. CIT (A) is not acceptable as the assessee has
      failed to establish these provisions to be of ascertained in nature in spite of
      ample opportunities provided by the A.O. Reliance has been placed by the
      A.O. on the judgment of Hon'ble supreme Court in the case of Shree
      Sajjan Mills in which it has been mentioned that nature of provisions for
      gratuity is a contingent liability because the payment of gratuity is made in
      consideration of the entire length of service & it's ascertainment depends
      upon several factors & until unless the employee is retired or his services
      are terminated, the right to receive gratuity remains as his contingent right.

      (B)     On the facts & the circumstances of the case, the Ld. C1T(A) has
      erred in deleting the above addition of Rs.1,80,79,857/- made by the A.O.
      as the same is not allowable on unclassified land or lease hold land as per
      companies act & also the department has already filed 2nd appeal before
      the Hon'ble ITAT on the same issue in earlier year.
                                        3                    ITA No.424/Del./2013

      (C)     The order of the Ld CIT(A) has not been found acceptable as A.O.
      has rightly applied Rule 8D which came into effect w.e.f. 01.04.2008.
      Further, on one hand the assessee has made huge investments for earning
      tax free dividends & on other hand huge interest has been paid on loans.
      Hence the assessee has claimed expenditure on income not offered for
      taxation.

      (D)   That the appellant craves for the permission to add, delete or
      amend the grounds of appeal before or at the time of hearing of appeal."


5.    Apropos Ground 1 is in respect of claim of provision for gratuity

and other benefits which are not allowable, since they are contingent in

nature while computing book profit u/s 115JB of the Act. The AO in this

regard noted that the assessee while computing book profits did not

consider the following provisions earmarked for addition while computing

book profit u/s 115JB of the Act:-


         Sr. No.               Description                Amount
             1   Provision for Gratuity                47,66,82,534/-
             2   Provision for Leave Encasement        20,61,51,780/-
             3   Provision     for     EPF    Matching 6,33,04,525/-
                 Contribution on Leave Encashment
             4   Provision for Retired Employee Health 7,13,52,087/-
                 Scheme
             5   Provision for Leave Travel Concession    62,73,072/-
             6   Provision for baggage allowance on       19,46,240/-
                 superannuation
                 Total                                 82,57,10,238/-


The AO asked the assessee to show cause in this regard and the assessee

vide letter dated 17.08.2011 submitted its explanation.              After going

through the submission of the assessee, the AO observed that the

concerned provisions are not an ascertained provisions i.e. a contingent
                                      4                   ITA No.424/Del./2013


liability and accordingly Rs.82,57,10,238/- was added to the book profit as

per the provisions of section 115JB of the Act.

6.    The ld. CIT (A), after going through the order of the AO and

submissions of the assessee, held as under :-

      "6.    I have considered the submissions of learned Counsel for the
      appellant and gone through the documents filed on record as well as
      the judicial rulings relied upon by the learned counsel and the AO.
      The grounds No.1 & 7 of appeal are general in nature and covered
      by the main grounds of appeal. In ground No. 2 of appeal, the
      appellant has challenged the addition of Rs.82,57,10,238/- made on
      account of the Provision for gratuity, leave encashment, post
      retirement medical benefit, LTC, Baggage allowance and Matching
      Contribution on Leave Encashment etc., for the purpose of
      computing tax liability u/s 115JB of the Act. As discussed in para 3
      of the assessment order, the AO has added the above provisions for
      the purpose of computing book profit u/s 115JB following the
      decision of Hon'ble Supreme Court in the case of Shree Sajjan Mills
      vs. CIT (156 ITR 585) after holding the said provisions to be only
      contingent and unascertained. The appellant has contended that the
      above provisions were created in accordance with accounting
      principles and standards; the valuation of liabilities was based on
      compilation of various details and by adopting actuarial valuation;
      the liabilities were 'ascertained' and the Profit & Loss Account was
      prepared in accordance part II and III of Schedule-VI of the
      Companies Act. Therefore, the book profit declared as per the Profit
      and Loss account should have not been disturbed in view of decision
      of Hon'ble Apex Court in the case of ApolloTyres Ltd. vs. CIT (255
      ITR 273). The reliance has also been placed on the decision of
      Hon'ble Supreme Court in the case of Bharat Earth Movers Limited
      vs. CIT (112 Taxman 61) and the decision of Hon'ble Mumbai High
      Court in the case of CIT vs. Echjay Forgings Pvt. Ltd. (116 Taxman
      322) in support of contentions that when the liabilities were
      determined on the basis of actuarial calculations, the same
      represented ascertained liabilities. The identical issue was also
      involved in the case of appellant for A.Y.2008-09 and as per the
      detailed discussion vide para 6.1 of my order dated 02.01.2012 in
      appeal No.276/2010-11 after considering the provisions of law, legal
      position on this issue emanating from relied upon judicial rulings
      and the decision of Ld. CIT (Appeals) Faridabad vide order dated
      29.04.2010 in appeal No.137/2009-10 for A.Y.2007-08, this issue
      was decided in favour of the appellant. Since the issue is already
      covered by the decision for earlier years, the AO is directed to
                                      5                ITA No.424/Del./2013


      compute the book profit without making any addition for aforesaid
      provisions. The addition of Rs.82,57,10,238/- made by the AO for
      the purpose of determining book profit u/s 115JB of the Act is
      deleted. The ground of appeal is allowed."





7.    Aggrieved by the deletion of the said addition made by the AO, the

department is before us.

8.    At the outset itself, the ld. AR for the assessee submitted that this

issue is covered in favour of the assessee in assessee's own case in ITA

No.1105/Del/2006 for Assessment Year 2002-03 order dated 21.11.2008

of the Tribunal. He also submitted that further, in assessee's own case in

assessment years 2004-05, 2005-06, 2007-08 and 2008-09, relying on the

order of the Tribunal (supra), the co-ordinate Benches of the ITAT has

decided this issue in favour of the assessee.

9.    We have heard the submission and perused the material on record.

The Tribunal in ITA No.1105/Del./2006 for assessment year 2002-03

order dated 21.11.2008 has considered an identical issue and had decided

the matter in favour of the assessee. The aforesaid order of the Tribunal

was followed in subsequent assessment years 2005-06, 2007-08 and 2008-

09.   Since identical issue has been considered by the Tribunal in the

aforesaid assessment years and the issue raised before us is covered by the

decision of the coordinate Benches of the Tribunal in assessee's own case

for assessment year 2002-03 (supra), we confirm the order of the ld. CIT

(A) on this issue.
                                     6                  ITA No.424/Del./2013


10.   Apropos Ground 2 is regarding depreciation on land amortized

while calculating book profits under section 115JB. The AO noticed that

assessee had claimed an amount of Rs. 1,80,79,857/- as per schedule 5 of

the balance sheet on account of depreciation on land unclassified and

leasehold land. Out of the total depreciation on land of Rs. 2,49,92,137/ -,

an amount of Rs. 1,80,79,857/ - had been debited to profit and loss account

and balance amount of Rs.69,12,280/- had been added to the cost of capital

work in progress. The AO confronted the assessee with these facts that

Depreciation on the land was not allowed as per the Companies Act and

accordingly, why the depreciation may not be added back to the shown

book profit to work out the book profit as per Companies Act, 1956. The

assessee replied the same vide submission dated 20.12.2011. The AO

examined the reply submitted by the assessee and observed that as per

schedule XIV of the Companies Act, 1956, no rate of depreciation has

been prescribed for land. He also observed that the case of Apollo Tyres

Ltd. vs CIT (2002) 255 ITR 273 (SC), relied upon by the assessee, did not

apply to the case of assessee. He observed that the Apex Court judgement

clearly says that book profit computed should be in accordance with the

part II and III of Schedule VI to the Companies Act, 1956.       He further

observed that as far as Depreciation on land was concerned, it was neither

prescribed in Income Tax Act, 1961 nor in Companies Act, 1956. Hence,

accounts of the company are not in accordance with the provision of part II
                                       7                  ITA No.424/Del./2013


and III of Schedule VI of the Companies Act, 1956. Thus, he disallowed

the claim being not in accordance with Companies Act to the extent of

Rs.1,80,79,857/- as this amount has been debited to P & L account and

accordingly, added back to the figure of book profit.

11.   While allowing this issue in favour of the assessee, Ld. CIT (A) held

as under :-

      "6.1. The ground No. 3 of appeal has been taken against the
      disallowance of Rs.l,80,79,857/- on account of amortization of land
      (depreciation) while computing book profits u/s 115JB of the Act.
      While making the disallowance, the AO's contention has been that
      the depreciation on land is neither prescribed under the Income Tax
      Act nor in the Companies Act, 1956 and hence, the accounts of the
      company were not in accordance with the provision of part II and In
      of schedule VI of the Companies Act. The appellant, on the other
      hand, has contended that amortization of lease hold land has been
      made as per accounting standard 10 of ICAI and amortization of
      land unclassified as per Accounting Standard 6 of ICAI and in view
      of CAG, which has been done to meet the requirement of companies
      Act and amortization of land is permitted u/s 115JB. The identical
      issue was also involved in the case of appellant for A.Y.2008-09 and
      as per the detailed discussion vide para 6.2 of my order dated
      02.01.2012 in appeal No.276/2010-11, this issue has been decided in
      favour of the appellant. Since the issue is already covered by the
      decision for earlier year, the addition of Rs.1,80,79,857 /- made by
      the AO for the purpose of computing book profit u/s 115JB of the
      Act is directed to be deleted. The ground No.3 of appeal is allowed."

12.   At the outset itself, the ld. AR for the assessee submitted that this

issue is covered in favour of the assessee in assessee's own case in ITA

No.2449/Del/2008 for Assessment Year 2004-05 order dated 30.09.2014

of the Tribunal and took our attention to page 6, para 7 of the order. He

also submitted that the ITAT, relying on the aforesaid order dated
                                         8                    ITA No.424/Del./2013


30.09.2014 (supra), has decided this issue in favour of the assessee in

assessee's own case in assessment years 2007-08 and 2008-09.

13.    We have heard rival submissions and perused the material on record.

The Tribunal in the order for assessment year 2002-03 (supra) has

considered an identical issue and had decided the matter in favour of the

assessee. The aforesaid order of the Tribunal was followed in subsequent

assessment years 2005-06, 2007-08 and 2008-09.               Since identical issue

has been considered by the Tribunal and the issue raised before us is

identical to the issue covered by the coordinate Bench of the Tribunal in

assessee's own case for assessment year 2002-03 (supra) and other years,

respectfully following the same, we confirm the order of the ld. CIT (A) on

this issue.

14.    Apropos Ground 3 is regarding disallowance under section 14A of

the Act. The AO noticed from the balance sheet that there were dividend

bearing investments and the assessee earned dividend during the year on

such investments as per following details :-

          Name of the Company                Investment as on Dividend Received in
                                             31.03.2009   Rs. Rupees
                                             Crores
          NHDC                                        1002.42         50,42,88,000
          Power Trading Corp.                           12.00         1,20,00,000/-
          Indian Overseas Bank                           0.36           12,62,800/-
          National Power Exchange Ltd.                   0.83                     -
                      Total                           1015.61        51,75,50,800/-

The AO observed from the aforesaid that the assessee had earned exempt

income to the tune of Rs. 51,75,50,800/ - during the year which was not
                                     9                  ITA No.424/Del./2013


includible to the total income and hence was required to disallow expenses

on account of such income as per the provisions of section 14A of the Act.

The AO confronted the assessee and the assessee informed that a

disallowance of Rs.13.78 Crores had already been made on this account.

According to the AO, the said disallowance of expenditure made by the

assessee was not satisfactory and hence, he asked assessee again to show

cause vide order sheet entry dated 20.12.2011 as to why appropriate

disallowance as per the provisions of section 14A be not made. The AO

also asked the assessee to file computation as per Rule 8D of the Income-

tax Rules, 1962 (hereinafter `the Rules) as provided under the provisions

of section 14A for this purpose. In response, the assessee filed a reply vide

letter dated 23.12.2011. The AO after going through the reply filed by the

assessee observed that that by applying Rule 8D, the quantum of

disallowance comes at Rs.29.75 Crores as against which the assessee has

made a disallowance of Rs. 13.78 Crores. Accordingly, the AO computed

disallowance as per Rule 8D of Rs.15.97 Crores (i.e. Rs.29.75 ­ Rs.13.78

= Rs.15.97 crores).    However, the AO made disallowance of Rs.5.08

crores (i.e. 0.5% of the total investment which is Rs.1015.20 crores) under

the provisions of section 14A of the Act and accordingly, made an addition

of Rs.5.08 Crores.

15.   Aggrieved, the assessee filed an appeal before the CIT (A) and the

CIT (A) deleted the addition by observing as under :-
                                    10                    ITA No.424/Del./2013

"6.2. In ground No.5 of appeal, the appellant has challenged the addition
of Rs.15,97,10,866/- made by invoking the provisions of section 14A of
the Act while computing regular income of the assessee. There is no
dispute to the fact that the appellant has declared dividend income of
Rs.51.75 crores which has been claimed exempt. The said dividend
income has been earned from the investment in shares of the entities as
under:

       1.      NHDC                                  Rs.1002.42 crores
       2.      Power Trading Corporation             Rs. 12.00 crores
       3.      Indian Overseas Bank                  Rs.   0.36 crores
       4.      National Power Exchange Ltd.          Rs.   0.83 crores
                                    Total            Rs.1015.61 crores

The NHDC is a subsidiary company of the assessee in which investment
has been made as per the sanction order of Govt. of India, Ministry of
Power,       vide      DO       No.22/3/2000/28.3.2002        and       order
No.34/1/2003/DO/NHPC dated 29.5.2003, out of budgetary support and
equity capital invested by the Govt. to the extent of Rs.772.42 crores. The
balance investment of Rs.230.00 crores has been made in the shares of
subsidiary company out of funds raised from the issue of 'O' series bonds.
The interest and bond issue expenses aggregating to Rs.13.78 crores
consisting of interest of Rs.13.67 crores calculated at the rate of 7.7%
applicable to bonds and bond issue / service charges of Rs.10.27 lacs in
respect of investment of Rs.230.00 crores have already been disallowed by
the assessee u/s 14A of the Act. The investment of Rs.12.00 crores in the
shares of PTC, Rs.36.00 lacs in the shares of Indian Overseas Bank and
Rs.83.00 lacs in the shares of National Power Exchange has been stated to
be out of internal accruals. The necessary details and submissions in this
regard were filed by the assessee but the AO did not consider the suomoto
disallowance made by the assessee as satisfactory and in accordance with
Rule 8D of the Income Tax Rules, 1962. The AO has therefore, applied
Rule 8D and worked out the disallowance of Rs.0.10 crores, 24.57 crores
and Rs.5.08 crores, aggregating to Rs.29.75 crores, under clause (i), (ii)
and (iii) of Sub-Rule (2) of Rule 8D, respectively. The fact that the
investment of Rs.772.42 crores made by the appellant in the shares of
subsidiary company NHDC was out of budgetary support and equity
contribution by the Govt. of India has not been disputed by the AO. The
admitted fact therefore, remains that the investment of Rs.772.42 crores
was directly from interest free funds contributed by the Govt. of India. If
that being so, this amount cannot go into the working of disallowance of
interest even if Rule 8D is applied. Clause (ii) of Sub-Rule (2) of Rule 8D
provides for working of disallowable interest 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. Thus,
there is no direct interest expenditure for the investment of Rs.772.42
crores and the direct interest expenditure of Rs.13.78 crores pertaining to
investment of Rs.230.00 crores in the shares of NHDC has already been
disallowed by the appellant. The Hon'ble ITAT, Bench 'F' Delhi in the
case of Priya Exhibitors Pvt. Ltd. vs. ACIT (27 taxmann.com 88) has held
                                   11                     ITA No.424/Del./2013




that the disallowance under section 14A requires a clear finding of
incurring of expenditure and in absence of same, no disallowance could be
made. Similarly, the Hon'ble ITAT, Bench 'G' Delhi in the case of ACIT
VS. SIL Investment Ltd. (26 taxmann.com 78) has held that where
Assessing Officer did not bring any evidence on record to establish that
any expenditure had been incurred by assessee for earning exempt income,
it was wrong on part of Assessing Officer to proceed to compute
disallowance of expenses under section 14A by merely applying rule
8D(2)(iii). The legal implications of sub-section (2) and (3) of section 14A
have been examined by the Hon'ble Delhi High Court in Maxopp
Investment Ltd. vs. CIT (347 ITR 272) and it has been decided in para 29
of the order 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 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 in
                                         12                     ITA No.424/Del./2013

              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 80 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."

      It is however, observed from para 5 of the assessment order that the AO
      has not assigned any reason while finding the submissions of the appellant
      as unsatisfactory. The identical issue was also involved in the case of
      appellant for A.Y. 2008-09 and as per the detailed discussion vide para 6.4
      of my order dated 02.01.2012 in appeal No.276/2010-11 after considering
      the provisions of law and legal position emanating from relied upon
      judicial rulings, this issue has been decided in favour of the appellant.
      Since the issue is already covered by the decision for earlier year, the
      addition of Rs.15,97,10,866/- made by the AO by invoking section 14A of
      the Act is directed to be deleted. The ground No. 5 of appeal is allowed."


16.   Aggrieved by the impugned order of the CIT(A), the Revenue is

before us. The ld DR, supported the order of the AO, and took us to the

same and argued that since admittedly the assessee is in receipt of exempt

income, the AO, rightly invoked Rule 8D, to disallow expenditure as

mandated by the Rule. So, he wants us to reverse the order of CIT(A) and

restore the order of AO. On the other hand, Ld. AR for the assessee

submitted that the assessee has suo motu disallowed an amount of

Rs.13.78 crores. He submitted that the AO made computation as per Rule

8D, which came to Rs.29.75 crores and he made disallowance of Rs.15.97

crores. Ld. AR submitted that this issue is covered in favour of assessee in

assessee's own case for the AY 2008-09 in ITA No.1402/Del./2012 dated

17.10.2014.     He further submitted that without prejudice to aforesaid

decision of the Tribunal on this issue, the disallowance made by AO
                                      13                 ITA No.424/Del./2013


invoking the provisions of section 14A read with Rule 8D, rejecting the

disallowance made by the assessee suo motu, without giving any reason

why the amount disallowed by the assessee himself is not satisfactory. He

submitted that it is a settled position that before invoking the provisions of

Rule 8D, the AO has to record an objective satisfaction with regard to the

disallowance made by assessee not being satisfactory, which has not been

done in this case. He further submitted that this issue is squarely covered

with the judgment of Hon'ble jurisdictional High Court in the case of CIT

Vs Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del). He also

relied on the decision of ITAT, Pune Bench in the case of Kalyani Steels

Ltd vs. ACIT, ITA No.1733/PN/2012 dated 30.01.2014. Ld. AR further

relied on the decision of ITAT, Pune Bench in the case of Bharat Forge

Ltd. vs. ACIT in ITA No.795/PN/2013 Dated 30.05.2014. He also relied

upon seven more judgments/orders in this regard. So, he does not want us

to interfere in the order of ld CIT(A).

17.   We have heard both the parties and perused the records. We find

that the assessee has earned exempt income to the tune of

Rs.51,75,50,800/- and has suo motu disallowed Rs.13.78 crores under

section 14A of the Act. We find that the AO has invoked Rule 8D without

spelling out the reason for not being satisfied with the computation made

by the assessee in respect to expenditure incurred for earning the exempt

income. Without recording the objective satisfaction as required under
                                      14                   ITA No.424/Del./2013


sub-section (2) to section 14A that he is not satisfied with the correctness

of the claim of the assessee in respect of expenditure in respect to exempt

income, the AO cannot invoke Rule 8D to compute the disallowance under

the said Rule. The Hon'ble jurisdictional High Court in the case of CIT vs.

Taikisha Engineering India Limited reported in 370 ITR 338 (Del.) has

held as under :-

     "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 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."


After going through the other cases also, relied upon by the ld. AR, we

find that the AO has not recorded the satisfaction envisaged by the statute

before invoking the computation provided for under Rule 8D, which
                                       15                  ITA No.424/Del./2013


vitiates the impugned order. We also find that in assessee's own case for

the previous year also, the Tribunal has deleted the addition made by the

AO on this account. Therefore, we uphold the order of the CIT (A) on this

issue. This ground of revenue's appeal is dismissed.

18.     In the result, the appeal of the revenue is dismissed.



      Order pronounced in open court on this 26th day of August, 2015.



                  Sd/-                                     sd/-
          (S.V. MEHROTRA)                              (A.T. VARKEY)
        ACCOUNTANT MEMBER                             JUDICIAL MEMBER

Dated the 26th day of August, 2015
TS

Copy forwarded to:
     1.Appellant
     2.Respondent
     3.CIT
     4.CIT(A), Faridabad.
     5.CIT(ITAT), New Delhi.
                                                               AR, ITAT
                                                             NEW DELHI.

 
 
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