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H.T. MEDIA LIMITED Vs. PRINCIPAL COMMISSIONER OF INCOME TAX-IV, NEW DELHI
September, 21st 2017
$~
*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+                         ITA No. 548/2015

                                     Reserved on: 1st August, 2017
                                     Decided on: 23rd August, 2017

H.T. MEDIA LIMITED                                    ..... Appellant
               Through:        Mr. Ajay Vohra, Senior Advocate with
                               Mr. V.P. Gupta and Mr. Arunav
                               Kumar, Advocates.

                                versus

PRINCIPAL COMMISSIONER OF
INCOME TAX-IV, NEW DELHI                   ..... Respondent
             Through: Mr. Raghvendra Singh and Mr. Rajesh
                      Manchanda, Senior Standing counsel

                                AND
+                         ITA No. 549/2015

H.T. MEDIA LIMITED                                    ..... Appellant
               Through:        Mr. Ajay Vohra, Senior Advocate with
                               Mr. V.P. Gupta and Mr. Arunav
                               Kumar, Advocates.

                                versus

PRINCIPAL COMMISSIONER OF
INCOME TAX-IV, NEW DELHI                    ..... Respondent
              Through: Mr. Raghvendra Singh and Mr. Rajesh
                       Manchanda, Senior Standing counsel.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE PRATHIBA M. SINGH


ITA 548/2015 & 549/2015                                   Page 1 of 34
                               JUDGMENT
%                                23.08.2017

Dr. S. Muralidhar, J.:
1. These are two appeals by the Assessee, H.T. Media Limited, under
Section 260 A of the Income Tax Act, 1961 ('Act') against the common
order dated 18th March 2015 passed by the Income Tax Appellate
Tribunal (`ITAT') in ITA Nos. 340 and 986/Del/2012 for the
Assessment Year (`AY') 2008-09.

Questions of law
2. While admitting ITA No. 548 of 2015 on 15th October 2015, the
following question was framed for consideration:
       "Whether the ITAT erred in remitting the matter concerning the
       deletion of disallowance of interest under clause (ii) of Rule 8 D
       (2) of the Income Tax Rules, 1962 to the Assessing Officer for a
       fresh determination in light of the decision of this Court in CIT v.
       Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del)?"

3. While admitting ITA No. 549 of 2015 on 15th October 2015, the
following question was framed for consideration:
       "Whether the Assessing Officer recorded a proper satisfaction in
       terms of Section 14A (2) and Rule 8 (D) of the Income Tax
       Rules, 1962 and, in calculating the disallowance at 0.5% of
       average value of investments as per clause (iii) of Rule 8 D (2) of
       the Income Tax Rules, 1962?"


ITA 548/2015 & 549/2015                                        Page 2 of 34
4. The Appellant-Assessee is engaged in the business of printing and
publishing newspapers and periodicals. For the AY in question, the
Assessee filed its return on 30th September 2008 declaring a total
income of Rs. 1,61,78,06,133/-. Thereafter, it filed a revised return on
30th March 2010 declaring a total income of Rs. 1,60,96,08,330/-.

Proceedings before the Assessing Officer
5. The return was picked up for scrutiny and notice was issued by the
Assessing Officer (`AO') to the Assessee under Section 143 (2) of the
Act on 4th August 2009. Due to a change in AO, another notice under
Section 143(2) of the Act, along with a questionnaire under Section 142
(1) of the Act, was issued to the Assessee on 12th July 2010.

6. During the AY in question, the Assessee had made certain
investments in shares/mutual funds/bonds etc. The Assessee received
dividend income of Rs.2,94,38,025 from mutual funds which was
claimed as exemption under Section 10 (35) of the Act. In response to
the questionnaire issued by the AO, the Assessee stated, by way of its
letter dated 15th November 2011, that all the investments from which
dividend was received had been made by it out of its own funds and no
borrowed funds had been utilized for the purpose. Accordingly, no
interest expenditure had been incurred in relation to earning of exempt
income.

7. Furthermore, in regard to the administrative expenses, it was
submitted that the income had been earned on units of mutual funds.


ITA 548/2015 & 549/2015                                         Page 3 of 34
There were only nineteen entries during the year. It was stated that
investments of the Assessee were under the reinvestment schemes.
Accordingly, no day-to-day activity was involved in relation to earning
of exempt income. Income had been reinvested and accounting entries
had been passed in the books of account only on redemption or
switching over to another scheme. Nevertheless, the Assessee had made
disallowance of Rs. 3 lakhs in the return of income in order to cover
administrative expenses which are said to have been incurred in relation
to earning of exempt income.

8. In the assessment order dated 27th December 2010, the AO held that,
from the three clauses of Rule 8D of the Income Tax Rules, 1962
(`Rules'), "it clearly emerges that the stipulation of the provision is to
compute the amount of expenditure which is not allowable under
Section 14A of the Act as is relatable to the exempt income and not in
considering all the expenses one by one for ascertaining if either of
them have resulted into exempt income and thereafter considering such
amount as disallowable under Section 14A." The AO referred to the
decision of the Bombay High Court in Godrej and Boyce Mfg. Co.
Ltd. v. CIT [2010] 328 ITR 81 (Bom).

9. It was further observed that making of investment, maintaining or
continuing investment, and time of exit from investment are well
informed and well coordinated management decisions involving not
only inputs from various sources but also acumen of senior
management functionaries. Therefore, cost is inbuilt into even the so

ITA 548/2015 & 549/2015                                       Page 4 of 34
called `passive' investments. There are incidental expenses of
collection, telephone, follow-up, research etc. Therefore, expenses in
relation to earning of income are embedded in direct expenses. The AO,
accordingly, held that the Assessee had incurred expenses to manage its
investments and had failed to calculate such expenses in a reasonable
manner to ascertain the true and correct picture of its income. The AO
computed the total disallowance under Rule 8D (2) as Rs.8,97,49,579/-
comprising Rs.3 lakhs being the amount of expenditure directly
incurred relating to exempt income under clause (i) of Rule 8D (2);
Rs.6,86,27,884/- being the interest expenditure incurred under clause
(ii) of Rule 8D (2); and Rs.2,08,21,695/-, being the amount equal to
0.5% of the average value of investments under clause (iii) of Rule 8D
(2).

Order of the CIT (A)
10. The Assessee went in appeal before the Commissioner of Income
Tax (Appeals) [`CIT (A)']. By the order dated 15th December 2011, the
CIT (A) held that the documents placed on record by the Assessee
showed that the term loan taken from State Bank of India (SBI) had
been utilized for repayment of earlier loans. It could not be said that any
amount of the term loan had been utilized for making investment. The
CIT (A) further noted the submission of the Assessee that the deposits
accepted at various units of the company from vendors and transporters
for security had no relationship with the investments made by the
corporate office of the company. The interest earned thereon was, thus,



ITA 548/2015 & 549/2015                                        Page 5 of 34
not relatable to the exempt income. The interest payment made to
Deutsche Bank was not for any loan utilised for making investments.
The interest payments made to ABN Amro Bank and Citibank related
to the debit balances in the current accounts with them. They were not
relatable to investments made by the company. The Assessee contended
that even if pro rata interest out of the above was considered as
relatable to exempt income, such expenditure would be covered within
the amount of Rs. 3 lakhs offered by the Assessee as disallowance.

11. As regards disallowances on account of administrative expenses,
the CIT (A) declined to follow the order earlier issued for the AY 2005-
06. It was held that, for AY 2008-09, the AO was bound to apply Rule
8D of the Rules. The CIT (A) held that the AO was justified in
determining the administrative cost at 0.5% of the average value of the
investments. Accordingly, disallowance of expenses to the tune of
Rs.2,08,21,695/- was held to be justified. However, the CIT (A) deleted
the disallowance of the interest amount of Rs.6,86,27,884/- on the basis
that no term loan had been utilized for making investments.

Impugned order of the ITAT
12. Both the Assessee and the Revenue went in appeal before the ITAT
against the above order of the CIT (A). By the impugned order, dated
18th March 2015, the ITAT reversed the order of the CIT (A) as regards
disallowance of interest amount and remanded the matter to the AO for
a fresh determination. It negatived the plea of the Assessee that the AO
had not recorded his satisfaction about the incorrectness of the claim

ITA 548/2015 & 549/2015                                       Page 6 of 34
made by the Assessee about no interest expenditure having been
recorded. The ITAT held that in view of the decision of this Court in
CIT v. Taikisha Engineering India Limited (2015) 370 ITR 338 (Del),
the disallowance on account of interest could not be deleted simply on
the ground that the Assessee's own capital and interest free funds were
more than the funds invested in securities yielding exempt income. The
ITAT held that reasoning given by it in the immediate preceding year,
i.e., AY 2007-08 for deleting such disallowance under Section 14A
could not be applied from AY 2008-09 onwards, when Rule 8D had
come into force. It was held that the ends of justice would be
adequately met if the impugned order on this issue was set aside and the
matter restored to the file of AO for deciding this aspect afresh.

13. As regards the administrative expenses, again it was held that once
Rule 8D had come into force the disallowance was required to be
computed with reference to mandate of Rule 8D (iii). The CIT (A) had
sustained the disallowance under clause (iii) of Rule 8D (2) of the Rules
at 0.5% of the average of the value of investment, which amount was
obviously much less than the actual expenditure incurred and claimed
as deduction by the Assessee. The said disallowance could not be
further reduced "to a lower level on an ad hocism." The disallowance of
Rs.2,08,21,695 as directed by the AO was accordingly upheld.

14. However the ITAT reversed the order of the AO to the extent that
Rs. 3 lakhs already disallowed by the Assessee was once again
disallowed by the AO. The ITAT further noted that during the AY in

ITA 548/2015 & 549/2015                                        Page 7 of 34
question, the Assessee had earned a total exempt income of Rs. 2.94
crore whereas the disallowance made by the AO stood at Rs. 8.97 crore.
In light of the law explained in CIT v. Holcim India Pvt. Ltd. (2014) 90
CCH 681 (Del), the disallowance under Section 14A could not exceed
the amount of exempt income. Accordingly the ITAT directed the AO
to take the ratio of the said decision into consideration while computing
finally disallowable amount under Section 14A of the Act.

Assessee's application before the ITAT
15. An application was filed by the Assessee before the ITAT under
Section 254 of the Act for rectification of the impugned order. It was
pointed out that the impugned order of the ITAT had wrongly recorded
that the CIT (A) had deleted the addition since the Assessee's own
capital and interest free funds were more than the investments in
securities yielding exempt income. The Assessee pointed out that the
CIT (A) ordered the deletion on the basis of a factual holding that no
interest bearing funds were utilized by the Assessee during the AY in
question for the investments that yielded exempt income. Accordingly,
it was prayed that the order of the ITAT be rectified.

16. The above application was dismissed by an order dated
4th December 2015 of the ITAT. The ITAT noted that upon perusal of
Schedule 6 of the Annual Accounts of the Assessee for the relevant
AY, "it transpires that some of such Investments in securities have been
made fresh during the year under consideration alone." Therefore, the
ITAT disregarded the contention of the Authorized Representative

ITA 548/2015 & 549/2015                                      Page 8 of 34
(`AR') of the Assessee that the investment in such securities were made
in the earlier years which have been accepted by the ITAT to be from
non-interest bearing funds. It was held that no mistake had crept into
the impugned order which would warrant rectification under Section
254 (2) of the Act.

17. It requires to be recalled at this stage that the Assessee has filed two
appeals against the impugned order of the ITAT for the AY in question.
ITA No. 548 of 2015 pertains to disallowance of interest expenditure
incurred to earn exempt income and ITA No. 549 of 2015 pertains to
disallowance on account of administrative expenses.

Submissions on behalf of the Assessee
18. Mr. Ajay Vohra, learned Senior counsel appearing for the Assessee,
first took up the issue of disallowance of expenditure incurred to earn
exempt income under Section 14A of the Act on account of interest.
Mr. Vohra pointed out that, despite the Assessee explaining in detail in
its letter dated 15th November 2010 addressed to the AO that no interest
bearing funds had been utilised for making investments during the AY
in question, the AO failed to consider the said submissions in the
assessment order dated 27th December 2010. The factual finding of the
CIT (A) that no loans had been utilized for the purpose of investments
and that the position for the AY in question was no different from AYs
2005-06, 2006-07 and 2007-08 was not found to be incorrect by the
ITAT.



ITA 548/2015 & 549/2015                                         Page 9 of 34
19. Mr. Vohra further pointed out that the ITAT had erred in recording
that the Assessee had contended that its own funds were more than the
investments and, therefore, there should be no disallowance under
Section 14 A of the Act. In fact the Assessee's contention, which was
accepted by the CIT (A), was that during the AY in question no interest
bearing funds had been utilised for making investments.

20. Mr. Vohra submitted that the ITAT had also wrongly understood
and applied the ratio of decision of this Court in CIT v. Taikisha
Engineering India Limited (supra). Even in that decision, this Court
had emphasized that the AO was required to examine first "whether the
Assessee had incurred expenditure by way of interest in the previous
year, and secondly, whether interest paid was directly attributable to a
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."
Reliance was placed on the decision in Principal Commissioner of
Income Tax v. Bharti Overseas Pvt. Ltd. [2016] 237 Taxmann 417
(Del) where it was held that if there is no interest expenditure "which is
not directly attributable to any particular income or receipt", then "the
question of applying the formula" under Rule 8D (ii) of the Rules will
not arise.

21. Mr. Vohra referred to the statement given in the accounts, balance
sheets etc. for the years ended 31st March 2007 as well as 31st March

ITA 548/2015 & 549/2015                                        Page 10 of 34
2008 and submitted that in the present case it has been accepted by the
ITAT, on facts, that the loans had been utilized only for the purpose of
business and not for making investment and therefore, no proportionate
disallowance was required to be made. Mr. Vohra placed reliance on
the decision of the Supreme Court in Godrej & Boyce Manufacturing
Co. Ltd. v. DCIT [2017] 394 ITR 449 (SC) which held that in case no
disallowance was made in earlier years on the ground that no borrowed
funds had been utilized for the purpose of earning tax free income, no
disallowance can be made in later year also, following the principle of
consistency. It was further held that, irrespective of the fact that Rule
8D is retrospective or not, disallowance was to be determined either on
best judgment determination, as earlier prevailing, or as per Rule 8D. In
the absence of new facts or changed circumstances, it was argued, there
was no justification for the ITAT not following its own order for the
earlier AYs in the Assessee's own case. Mr. Vohra also placed reliance
on the decision of the Punjab and Haryana High Court in CIT,
Jalandhar-I v. Max India Limited [2016] 388 ITR 81 (P&H).

22. As regards disallowance on account of administrative expenses
forming subject matter of ITA No. 549 of 2015 in these appeals, Mr.
Vohra submitted that the AO had not considered the written note
submissions and details provided by the Assessee regarding investment
and nature thereof in the assessment order. Mr. Vohra further submitted
that in, both, Maxopp Investment Limited v. CIT [2012] 347 ITR 272
(Del) as well as the decision of the Bombay High Court in Godrej &






ITA 548/2015 & 549/2015                                      Page 11 of 34
Boyce Manufacturing Co. Ltd v. CIT [2010] 328 ITR 81 (Bom), it was
emphasized that "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 AO would have to indicate cogent reasons for the
same." It was also emphasized that the satisfaction of the AO "must be
arrived at on objective basis."

23. Mr. Vohra submitted that the calculation for the amount of
Rs. 3 lakhs claimed as the administrative expenses had been submitted
by the Assessee, along with the letter dated 15th November 2010 to the
AO. This was relatable to the cost of the finance department at the
corporate office. Even in the earlier AYs 2005-06 to 2007-08, it had
been held by the ITAT that disallowance for administrative expenses is
to be determined with reference to the cost of the finance department. It
is pointed out that the CIT (A) had upheld the disallowance by taking a
view that Rule 8D was to be applied in AY 2008-09 without
determining whether satisfaction had been properly recorded by the AO
or not. In the absence of recording such satisfaction of basis,
disallowance had to be restricted to what had been provided by the
Assessee, i.e. Rs. 3 lakhs. Alternatively, it was submitted that for the
purposes of Rule 8 D (iii) 0.5% of the average value of investment, in
terms of the decision in ACB India Ltd. v. ACIT (2015) 374 ITR 108
(Del) worked out to Rs. 18.24 lakhs and not the exorbitant sum of
Rs.2,08,21,695 as directed by the AO.




ITA 548/2015 & 549/2015                                      Page 12 of 34
Submissions on behalf of the Revenue
24. Mr. Raghvendra Singh and Mr. Ashok Manchanda, learned Senior
Standing counsel appearing for the Revenue, submitted as under:

(i) Section 14 A (2) of the Act read with Rule 8D (1) has two limbs.
First, is the exercise of discretion which requires the AO to record
satisfaction regarding correctness of the claim of expenditure made by
the Assessee. This will have to be determined "having regard to the
accounts of the Assessee of a previous year." Under the second limb, it
is argued that, once such satisfaction has been validly recorded, the AO
has no option but to apply the formula in accordance with sub-Rules (2)
and (3) of Rule 8D. Reliance was placed on the decisions of this Court
in CIT v. Taikisha Engineering India Limited (supra), ACB India
Limited v. ACIT (supra) and PCIT v. Bharti Overseas Pvt. Ltd.
(supra).

(ii) The question of recording of proper satisfaction by the AO was a
mixed question of law and fact and on this aspect there were concurrent
findings of both the lower appellate bodies in favour of the Revenue. In
the absence of any perversity pleaded, the Assessee should not be
allowed, in the appeal under Section 260A of the Act, to seek
interference with the above concurrent findings. Further, no substantial
question of law had been framed on this aspect.

(iii) The Assessee had itself offered a disallowance of Rs. 3 lakhs but
had not explained the basis. The Assessee had simply adopted a


ITA 548/2015 & 549/2015                                      Page 13 of 34
"historical figure". The validity of Rule 8D (2) had been upheld by the
Bombay High Court in Godrej & Boyce Mfg. Co. Limited v. CIT
(supra) which had been followed by this Court in Maxopp Investment
Ltd v. CIT (supra). It is pointed out that the decision in Godrej &
Boyce Mfg. Co. Ltd. v. CIT (supra) on this aspect has in fact been
upheld by the Supreme Court.

(iv) The history of Section 14A and Rule 8D showed that they were
applied to apportion expenditure for earning exempt and non-exempt
incomes when the Assessee carried a composite and indivisible
business. Therefore, Rule 8D, being a general rule, could not be
expected to produce an accurate amount in every case. Some variance
was inevitable. In any event, hardship and inequity are no grounds for
interference by this Court in matters of taxation.

(v) It is submitted that the three sub-clauses of Rule 8D(2) fulfil the
"proximate cause" test and "nexus" test. Each of the three sub -clauses
was directly or indirectly in relation to income which did not form part
of the total income under the Act. It is, accordingly, submitted that no
interference is called for with the judgment of the ITAT.

Analysis of relevant provisions
25. It is necessary in the first place to re-visit the statutory provisions
that are involved, viz., Section 14 A of the Act and Rule 8 D of the
Rules.




ITA 548/2015 & 549/2015                                        Page 14 of 34
  "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 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."

26. The 'Memorandum Explaining the Provisions of the Finance Bill,
2001' [2001] 248 ITR (St.) 162, 195, by which Section 14 A was
introduced, with retrospective effect from 1st April 1962, stated:
  "Certain incomes are not includible while computing the total income
  as these are exempt under various provisions of the Act. There have
  been cases where deductions have been claimed in respect of such
  exempt income. This in effect means that the tax incentive given by
  way of exemptions to certain categories of income is being used to
  reduce also the tax payable on the non-exempt income by debiting the
  expenses incurred to earn the exempt income against taxable income.


ITA 548/2015 & 549/2015                                         Page 15 of 34
  This is against the basic principles of taxation whereby only the net
  income, i.e., gross income minus the expenditure, is taxed. On the
  same analogy, the exemption is also in respect of the net income.

  Expenses incurred can be allowed only to the extent they are relatable
  to the earning of taxable income.

  It is proposed to insert a new section 14A so as to clarify the intention
  of the Legislature since the inception of the Income-tax Act 1961,
  that no deduction shall be made in respect of any expenditure
  incurred by the assessee in relation to income which does not form
  part of the total income under the Income-tax Act.

  The proposed amendment will take effect retrospectively from April
  1, 1962, and will accordingly, apply in relation to the assessment year
  1962-63 and subsequent assessment years."

27. In cases involving Section 14 A of the Act, the constant tug-of-war
lies in the Revenue wanting to increase the expenditure incurred to earn
exempt income for the purpose of disallowance, while the Assessee
seeks to establish the opposite. In CIT v. Walfort Share and Stock
Brokers P. Ltd. [2010] 326 ITR 1 (SC), the Supreme Court noted that
legislative intent behind Section 14A was not to allow deduction in
respect of any expenditure incurred by an Assessee in relation to
exempt income, i.e. income which does not form part of the total
income under the said Act, against the taxable income. The Supreme
Court observed as under:

  "In other words, section 14A clarifies that expenses incurred can be
  allowed only to the extent they are relatable to the earning of taxable
  income. In many cases the nature of expenses incurred by the
  assessee may be relatable partly to the exempt income and partly to


ITA 548/2015 & 549/2015                                        Page 16 of 34
  the taxable income. In the absence of section 14A, the expenditure
  incurred in respect of exempt income was being claimed against
  taxable income. The mandate of section 14A is clear. It desires to
  curb the practice to claim deduction of expenses incurred in relation
  to exempt income against taxable income and at the same time avail
  of the tax incentive by way of an exemption of exempt income
  without making any apportionment of expenses incurred in relation to
  exempt income . . . Expenses allowed can only be in respect of
  earning of taxable income. This is the purport of section 14A. In
  section 14A, the first phrase is 'for the purposes of computing the
  total income under this Chapter' which makes it clear that various
  heads of income as prescribed in the Chapter IV would fall within
  section 14A. The next phrase is, 'in relation to income which does not
  form part of total income under the Act'. It means that if an income
  does not form part of total income, then the related expenditure is
  outside the ambit of the applicability of section 14A."
28. In the same decision, the Supreme Court explained that " The
theory of apportionment of expenditure between taxable and non-
taxable has, in principle, been now widened under section 14A."

29. How this apportionment should take place was prescribed under
Rule 8D which came to be introduced with effect from 24th March
2008. Rule 8 D reads thus:
  "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

ITA 548/2015 & 549/2015                                     Page 17 of 34
  of expenditure in relation to such income in accordance with the pro
  visions of sub-rule (2).

  (2) The expenditure in relation to income which does not 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 x 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."


ITA 548/2015 & 549/2015                                        Page 18 of 34
30. Rule 8 D (1) states more or less what Section 14 A (2) of the Act
states. It requires the AO to first examine the accounts of the Assessee
and then record that he is not satisfied with (a) the correctness of the
Assessee's claim of expenditure or (b) the claim made by the assessee
that no expenditure has been incurred. Unless this stage is crossed i.e.
the stage of the AO recording that he is not satisfied with the clam of
the Assessee in the manner indicated i.e. after examining the Assessee's
accounts, the question of applying the formula under Rule 8D (2) does
not arise. That this is a mandatory pre-requisite for applying Rule 8D
(2) is fairly well-settled.

31.1 Illustratively reference may be made to the decision of the
Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd v. CIT
(supra) which was concurred with by this Court in Maxopp Investment
Limited v. CIT (supra) and reiterated in Commissioner of Income Tax
v. Taikisha Engineering India Limited (supra).

31.2 The Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v.
DCIT (supra) upheld the constitutional validity of sub-sections (2) and
(3) of Section 14 A of the Act. It was held that Section 14A was
applicable to the dividend income earned from mutual funds. The
exercise that had to be undertaken by the AO for applying Section 14A
was explained thus:
       "What merits emphasis is that the jurisdiction of the Assessing
       Officer to determine the expenditure incurred in relation to such


ITA 548/2015 & 549/2015                                      Page 19 of 34
       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 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."

31.3 The Bombay High Court further observed as under:
       "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

ITA 548/2015 & 549/2015                                       Page 20 of 34
       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."

Failure of the AO to record satisfaction
32. The question regarding the failure of the AO to record his
dissatisfaction with the correctness of the Assessee's claim regarding
administrative expenses of Rs. 3 lakhs arises in ITA 349 of 2015. Mr
Raghvendra Singh is not entirely right in his submission that there is no
question framed about the failure by the AO to record his satisfaction.
In ITA 349 of 2015, the question framed by this Court by the order
dated 15th October 2015 is in fact in two parts: viz., (i) Whether the AO
recorded a proper satisfaction in terms of Section 14A (2) and Rule 8
(D) of the Rules and (ii) in calculating the disallowance at 0.5% of
average value of investments as per clause (iii) of Rule 8 D (2) of the
Rules?

33. The contention of Mr. Singh is that if there was a valid recording of



ITA 548/2015 & 549/2015                                       Page 21 of 34
satisfaction by the AO as required by Rule 8D (1), then there was no
option available to the AO other than to apply Rule 8D (2) of the Rules.
Therefore, even according to the Revenue, the applicability of Rule 8D
(2) hinges on the recording of the AO in terms of Rule 8D (1) that he
was not satisfied with the Assessee's claim regarding expenditure
incurred to earn the exempt income.

34. The Assessee had explained that Rs. 3 lakhs was being disallowed
voluntarily as an "expenditure which could be attributable for earning
the said income." The Assessee explained that the disallowance had
been determined on the basis of cost of finance department in the ratio
of exempt income to total turnover. On that basis the disallowance in
AY 2005-06 was upheld by CIT (A) at Rs. 1 lakh. The disallowance for
this AY was worked out as Rs. 1,42,404/- and since the Assessee had
already made a disallowance of Rs. 3 Lacs, no further disallowance was
called for.

35. In order to disallow this expense the AO had to first record, on
examining the accounts, that he was not satisfied with the correctness of
the Assessee's claim of Rs. 3 lakhs being the administrative expenses.
This was mandatorily necessitated by Section 14 A (2) of the Act read
with Rule 8D (1) (a) of the Rules.

36. In para 3.2 of the assessment order, the AO records that, in answer
to the query posed by the AO requiring it to produce calculation for
disallowances, the Assessee "submitted that they have not incurred any


ITA 548/2015 & 549/2015                                      Page 22 of 34
expenditure for earning the dividend income." Thereafter, in para 3.3,
the AO records "I have considered the submissions of the Assessee and
found not to be acceptable." Thereafter, the AO proceeded to deal with
the said provisions of Section 14A and Rule 8D and observed, in para
3.3.1, that making of investment, maintaining or continuing investment
and time of exit from investment are well informed and well
coordinated management decisions that, in relation to earning of
income, are embedded in indirect expenses. It is then stated in para 3.4
that, in view of the above, the provisions of sub-section (2) of Section
14A and Rule 8D of the Rules are in operation and therefore, will
strictly be adhered to by the Assessee. In para 3.6 of the assessment
order, after discussing Section 14A(1) read with Rule 8D and referring
to the decision of the Bombay High Court in Godrej and Boyce Mfg.
Co. Ltd v. DCIT (supra), the AO simply stated that "in view of the
facts and circumstances and legal position on the issue as discussed
above, I am satisfied that the Assessee had incurred expenses to manage
its investments which may yield exempt income, and Assessee grossly
failed to calculate such expenses in a reasonable manner to ascertain to
ascertain the true and correct picture of its income and expenses."

37. In the considered view of this Court, the above observations of the
AO in the assessment order are of a broad general nature not with
particular reference to the facts of the case on hand.

38. The Court is also unable to agree with Mr. Singh that on this aspect
there are concurrent findings of both the CIT (A) as well as the ITAT.

ITA 548/2015 & 549/2015                                       Page 23 of 34
The CIT (A) disallowed the exempt expenses by merely repeating what
the AO had stated about the cost that is built into so called `passive'
investments and simply recorded that the AO was bound to Rule 8D
and, therefore, was justified in determining administrative costs at
0.5%.     Here again, the CIT (A) failed to note that without the
mandatory requirement, under Section 14A of the Act and Rule 8D of
the Rules, of satisfaction being recorded being met, the question of
applying Rule 8D (1) did not arise.

39. Turning now to the order of the ITAT, in para 33, it recorded the
submission of the AR that the AO did not record any satisfaction about
the Assessee not properly offering expenditure incurred in relation to
the exempt income at Rs. 3 lakhs. The ITAT reproduced the contents of
para 3.3.1 of the assessment order, which has been extracted by this
Court hereinbefore, which contains general observations regarding
earning of exempt income. This cannot be accepted as a recording by
the AO of satisfaction regarding the claim of the Assessee after
examining its accounts. Again, in para 34 of its order, the ITAT simply
reproduced para 3.3.6 of the assessment order where, again, no reasons
have been provided but only a conclusion has been reached that the AO
was "satisfied that the Assessee had incurred expenses to manage its
investments which may yield exempt income, and Assessee grossly
failed to calculate such expenses in a reasonable manner to ascertain the
true and correct picture of its income and expenses."




ITA 548/2015 & 549/2015                                      Page 24 of 34
40. Consequently on the aspect of administrative expenses being
disallowed, since there was a failure by the AO to comply with the
mandatory requirement of Section 14 A (2) of the Act read with Rule
8D (1) (a) of the Rules and record his satisfaction as required
thereunder, the question of applying Rule 8D (2) (iii) of the Rules did
not arise. The question framed in ITA 549 of 2015 is answered
accordingly.

Disallowance of interest expenses
41. As far as disallowance of interest expenses were concerned, the said
question arises and has been framed in ITA 548 of 2015. The stand of
the Assessee was that no interest bearing fund was utilised during the
AY in question for making investments which yielded exempt income.
Therefore, no disallowance on that score was warranted.

42. In this the context a reference is required to be made to the detailed
response given by the Assessee in its letter dated 15 th November 2010
in which it specifically stated that investments from where dividend
units were received as income "was not made out of borrowed fund
taken by the company."       A reference was made to Schedule 3 of
`Secured Loans' of the audited financials which showed that the
Assessee had not taken any new term loans. The balances of term loans
as of 31st March 2008 were same as that at 31st March 2007. The term
loan from Punjab National Bank was taken in the year 2004-05 and was
utilized in repayment of term loan taken from Central Bank of India in
the year 2004-05. The term loan from State Bank of India was taken in

ITA 548/2015 & 549/2015                                       Page 25 of 34
2005-06, was utilized in repayment of existing term loans taken from
Corporation Bank, State Bank of Patiala and Jammu & Kashmir Bank
respectively in the year 2005-06 itself. It was stated that "term loans are
not granted by the banks for making investments in mutual funds and
same also cannot be utilities as per the terms of the loans for making
investments in mutual funds." Further, an overdraft of Rs. 4,875.63
lakhs taken from the Deutsche Bank was showed under `secured loans'.
From the details filed in Annexure `B' to the letter in question it was
made evident that no investments in these mutual funds were made
from Deutsche Bank. As of 31st March 2008, the Assessee had cheques
in hand of Rs. 6,475.12 lakhs and this was sufficient to clear the
overdraft facility. These cheques were credited on the next working day
after close of the year and were utilized to clear the entire overdraft
balance.

43. The Assessee further explained that the investments were made out
of company bank accounts with overdraft facilities, viz., Central Bank
of India, Citibank and ABN AMRO respectively. Some investments
were also made out of switching over of funds from one scheme to
another. A copy of the bank statements showed that "the company had
utilized its own funds in form of collection from business operation,
proceeds from realization of fixed deposits and re-investment from
realization from other mutual funds schemes." These were evidenced
by the positive balances as on the date of investment in these bank
statements.






ITA 548/2015 & 549/2015                                        Page 26 of 34
44. It was stated by the Assessee that there was profit from operations
of Rs. 20,123.12 lakhs after providing for depreciation of Rs. 26,363.04
lakhs and the net cash funds of the Assessee stood at Rs. 14,427.69
lakhs. Therefore, after making all disbursements, including the
investments made during the year, funds to the tune of Rs. 6966.96
lakhs were available at year end under the heads `cash' and `bank
deposits'. Therefore, the Assessee had substantial funds of its own to
make investments under reference.

45. What is plain from the explanation offered by the Assessee, which
was not discarded by the AO on facts, was that there was no part of the
interest expenditure which did not bear a direct nexus to a loan that was
already borrowed in some earlier year. As explained by this Court in
Principal Commissioner of Income Tax v. Bharti Overseas Pvt. Ltd.
(supra), if there is no interest expenditure "which is not directly
attributable to any particular income or receipt", then "the question of
applying the formula" under Rule 8D (ii) of the Rules will not arise. In
other words, one of the pre-requisites for the applicability of the
formula Rule 8 D (2) (ii) of the Rules for determining the extent of
disallowance of interest, is that there must some interest expense which
is not attributable to any particular income or receipt. In the present
case, the AO does not indicate which part of the interest expense falls in
the above category.




ITA 548/2015 & 549/2015                                       Page 27 of 34
The decision in Taikisha Engineering
46.1 At this stage it is necessary to examine the decision of this Court
in Commissioner of Income Tax v. Taikisha Engineering India
Limited (supra). It must be recalled that the ITAT has in the impugned
order remanded the matter to the AO on the basis of the said decision.

46.2 In the first place, it requires to be noticed that said decision was in
the context of two AYs 2008-09 and 2009-10, and, therefore, the
question of applying Rule 8D of the Rules, which was inserted with
effect from 24th March 2008, arose for consideration.

46.3 The facts of the case were that, for AY 2008-09, the Assessee had
voluntarily disallowed expenditure of Rs. 1,15,000/- under Section 14A
of the Act, the calculation for which was submitted before the AO. The
AO noted that the voluntary disallowance offered in the return did not
fulfil the requirements of Section 14A of the Act read with Rule 8D of
the Rules. However, "no other reason was indicated." After discussing
the decision of the Bombay High Court in Godrej & Boyce Mfg. Co.
Limited v. CIT (supra), the AO recomputed the disallowance by
applying Rule 8D of the Rules and quantified the disallowance at
Rs. 42,59,540/-. The difference was accordingly added and the returned
income enhanced.

46.4 A similar exercise was undertaken by the AO for AY 2009-10.
Again, Rs.2,76,194/- was disallowed by the Assessee, the AO
computed the disallowance at Rs. 5,36,393/- and the disallowance was


ITA 548/2015 & 549/2015                                         Page 28 of 34
deleted by the CIT (A) and affirmed by the ITAT. What weighed with
the ITAT and the CIT (A) was that the Assessee had sufficient funds as
well as non-interest funds which were in excess of total investment
made and, therefore, the question of disallowing any interest
expenditure did not arise.

46.5 The Court, after referring to the decision of this Court in Maxopp
Investment Limited v. CIT (supra) and of the Bombay High Court in
Godrej and Boyce Mfg. Co. Ltd v. DCIT (supra), emphasized that
there was to be a minimum compliance with the mandatory requirement
under Section 14A(2) read with Section Rule 8D which requires the AO
to examine the accounts of the Assessee and, upon arriving at a
dissatisfaction as to the correctness of the claim of the Assessee in
respect of expenditure incurred in relation to exempt income, the AO
can determine the amount of expenditure which should be disallowed in
accordance with the method prescribed under Rule 8D of the Rules.
The Court explained that, unless such dissatisfaction was recorded in
the manner indicated under Section 14A of the Act, the question of
invoking Rule 8D of the Rules and the formula there under does not
arise.

46.6 On facts, this Court held that two factors were crucial in deciding
the issue in favour of the Assessee. One was the failure of the AO to
record his satisfaction and the second was the factual finding of the CIT
(A) as well as the ITAT that "the Assessee had sufficient funds for
making investments in shares and mutual funds."

ITA 548/2015 & 549/2015                                      Page 29 of 34
46.7 The Court explained that for the purposes of Rule 8D (2) (ii), the
AO was 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."

47. The above decision does not hold anything contrary to what has
been contended by the Assessee in the present case. If indeed the AO
had undertaken the exercise as mandated by this Court in
Commissioner of Income Tax v. Taikisha Engineering India Limited
(supra), he would have come to the conclusion that the interest paid
during the AY by the Assessee was entirely towards loans borrowed in
earlier years which had not been utilised for making investments that
yielded exempt income. However, what is surprising is that the ITAT,
by relying on the above observations, thought it fit to remand the matter
to the AO for a fresh determination on the ground that the disallowance
on account of interest under Rule 8D "cannot be deleted simply on the
ground that the assessee's capital and interest free funds are more than
the funds invested in securities yielding exempt income."

48. In fact, as rightly pointed out by the Assessee, this was not the
ground on which the disallowance was deleted by the CIT (A) in the
present case. As already noted the CIT (A) ordered the deletion on the

ITA 548/2015 & 549/2015                                      Page 30 of 34
basis of a factual holding that no interest bearing funds were utilized by
the Assessee during the AY in question for the investments that yielded
exempt income. The Assessee went before the ITAT for rectification of
the impugned order on account of the erroneous recording by the ITAT
of its submission in this regard.

49. There was no necessity for the ITAT to have remanded the issue
regarding disallowance of interest expenses under Section 14 A to the
AO for a fresh determination. The details placed on record by the
Assessee, and particularly its audited accounts, demonstrated with
sufficient clarity that no part of any interest bearing funds had been
utilised during the AY in question for making investments that yielded
exempt income.

Decision of the Supreme Court in Godrej & Boyce
50.1 At this juncture reference may be made to the decision of the
Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT
[2017] 394 ITR 449 (SC). The Supreme Court affirmed the decision of
the Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v.
DCIT (supra) on one question, viz., that Section 14 A of the Act
included within its scope dividend income on shares in respect of which
tax is payable under Section 115-O of the Act and income on units and
mutual funds on which tax is payable under Section 115 R of the Act.
However, the Supreme Court reversed the Bombay High Court on the
second question viz., the applicability of Section 14 A to the appellant
in that case.

ITA 548/2015 & 549/2015                                       Page 31 of 34
50.2 In the process of discussing the second question, the Supreme
Court observed that, irrespective of whether sub-sections (2) and (3) of
Section 14A of the Act were retrospective, "what cannot be denied is
that the requirement for attracting the provisions of Section 14A (1) of
the Act is proof of the fact that the expenditure sought to be
disallowed/deducted had actually been incurred in earning the dividend
income." On facts, it was noted that, in all of the AYs 1998-99, 1999-
2000 and 2001-02, "the Revenue had failed to establish any nexus
between the expenditure disallowed and the earning of the dividend
income in question."

50.3 The Supreme Court found no mention of the reasons which had
prevailed upon the AO to hold that the claims of the Assessee, that no
expenditure was incurred to earn dividend income, cannot be accepted
and why the order of the ITAT for the earlier AYs were not acceptable
to the AO, particularly, in the absence of any new fact or change of
circumstances. Further, the Supreme Court held that no basis has been
disclosed establishing a reasonable nexus between the expenditure
disallowed and the dividend income received.

50.4 The Supreme Court was concerned with AY 2002-03, i.e. prior to
Rule 8D being inserted in the statute book. Nevertheless it took note of
the changes and observed that this would make no difference to the
requirement of the AO having to establish "a reasonable nexus between
the expenditure disallowed and the dividend income received." What
also weighed with the Supreme Court was that the fact "that any part of

ITA 548/2015 & 549/2015                                      Page 32 of 34
the borrowings of the Assessee had been diverted to earn tax free
income despite availability of surplus or interest free funds
available.....remains unproved by any material whatsoever."

51. In the present case, the Assessee has been able to demonstrate that
the AO has failed to establish any direct nexus between the investments
made by the Assessee and the interest expenditure incurred. On the
other hand , the Assessee was able to show that any interest expenditure
incurred was in respect of various bank loans during the course of the
AY in question. The AO also failed to deal with the assertion of the
Assessee that it had sufficient own funds and, as such, had no occasion
to use borrowed interest bearing funds for that purpose.

Conclusion
52. As a result of the above discussion:
       (i) The question as framed in ITA No. 548 of 2015 is answered in
       the affirmative by holding that the ITAT erred in remanding the
       matter concerning deletion of disallowance of any interest under
       clause (ii) of Rule 8D (2) of the Act to the AO for fresh
       determination in light of the decision in Commissioner of
       Income Tax v. Taikisha Engineering India Limited (supra)

       (ii) The question framed in ITA No. 549 of 2015 is answered in
       the negative by holding that the AO failed to record proper
       satisfaction in terms of Section 14A (2) of the Act read with
       Rule 8D (1) (a) of the Rules and therefore, erred in calculating


ITA 548/2015 & 549/2015                                       Page 33 of 34
       the disallowance at 0.5% on overall value of the investments as
       per the Rule 8D (2) (iii) of the Rules.

53. The appeals are accordingly allowed. The effect is that the
Assessee's appeal before the ITAT on the issue of Section 14 A read
with Rule 8D of the Rules must be treated as allowed and the Revenue's
appeal on the said issue must be treated as dismissed.

54. There shall be no order as to costs.




                                                    S. MURALIDHAR, J.



                                                 PRATHIBA M. SINGH, J.
AUGUST 23, 2017
Rm




ITA 548/2015 & 549/2015                                      Page 34 of 34

 
 
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