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TMI Blog2012 (6) TMI 700X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed for statistical purposes. - IT APPEAL NO. 441 (BANG.) OF 2011 - - - Dated:- 21-9-2011 - N.K. SAINI, SMT. P. MADHAVI DEVI, JJ. Devaraj for the Appellant. Pratap Singh for the Respondent. ORDER N.K. Saini, Accountant Member This appeal filed by the assessee is against the order dated 16.03.2011 of the CIT, LTU, Bangalore. 2. In this appeal, the assessee has raised the following grounds: "1. The order of the CIT is bad in law. 2. The CIT erred in coming to the conclusion that the judgment favouring the appellant's stand was not applicable. The CIT erred in coming to the conclusion that the judgement favouring the appellant's stand was not applicable. 3. The CIT erred in coming to the conclusion that the provisions of section 14D read with rule 8D would apply even for the assessment year 2007-08, when in fact the said rule was made effective from the assessment year 2008-09. 4. The CIT erred in not appreciating the fact that the investments yielding the tax exempt income was out of the own funds of the appellant and not out of the borrowed funds. 5. The CIT erred in not appreciating the fact that the appellant had not incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under assessment of income to the tune of Rs. 10,73,220/- having tax effect of Rs.3.61 lakhs plus interest thereon. This has resulted in the assessment order being rendered erroneous in the sense that the provisions of the Income Tax Act have been omitted to be applied and prejudicial to the interest of revenue in view of tax and interest foregone." 5. The ld. CIT issued notice dated 15.11.10 u/s. 263 of the Act to the assessee. In response to that, the assessee furnished submission which has been mentioned in para 2 of the impugned order by the ld CIT and is reproduced verbatim as under: "You are of the opinion that the Assessing Officer ought to have applied the provisions of section 14A read with Rule 8D as the assessee had income from dividends to the extent of Rs. 80,14,144, which is an exempted income under section 10 of the Income Tax Act, 1961 (Act). For exercising jurisdiction under section 263 against an order, such order should have been an erroneous and also prejudicial to the interest of revenue. The assessment order in our case, as passed by the LAO is not erroneous for the following reasons: Though during the course of the assessment proceedings the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra ). Even assuming for the time being that the contrary decision also to be considered, then it is a well laid down legal principle that there being two propositions, the one beneficial to the assessee has to be applied Vegetable Products Ltd.. 88 ITR 192(SC)." 6. The ld. CIT did not find merit in the submissions of the assessee and considered the assessment order passed by the Assessing Officer to be erroneous insofar as it is prejudicial tcr the interests of revenue by observing in para 3.1 to 3.10 as under: "'3.1 I have carefully considered the arguments put forward by the assessee. From the assessment record, it is clear that the Assessing Officer did not consider the question of applicability of Rule 8D read with sec 14A. The Assessing Officer examined the issue of applicability of Rule 8D read with sec 14A only after assessment was concluded and after the file had been examined by the undersigned. This is also admitted by the assessee. 3.2 A perusal of the Return of income shows that the assessee claimed the entire dividend income of Rs. 80.14,144/- as exempt. As this income does not form part of total income, the assessee should have applied the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terpretation sought to be placed on section 271 (1 )(a)(i) by the parties wilful lead to some inconvenient result, but the duty of the court is to read the section, understand its language and give effect to the same. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be several of its decisions. Hence, all that we have to see is, what is the true effect of the language employed in section 271(1 )(a)(i). If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provisions relates to imposition of penalty." 3.5 The language of section 14A read with Rule 81) does not give rise to "two reasonable constructions". The Act is clear and unambiguous. Further, it is a well-settled law of interpretation that when the provisions of an enactment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a cost. Besides, section 14A docs not envisage disallowance of direct expenses alone. The methodology of computing the disallowance is provided in Rule 8D of the Income-tax Rules. Perusal of the same shows that the disallowance contemplated here is of both direct expenses as well as indirect expenses. Therefore the assessee's contention that since it has not incurred any expenditure, no disallowance can be made under section 14A is not acceptable. Moreover, sub-section (3) of section 14A says in very clear terms that the section is applicable even in a case where the assessee claims that no expenditure is incurred. 3.7 In this connection, it may be relevant to refer to the judgment of Delhi Bench of Hon'ble ITAT in Indian Sugar Exim Corpn. Ltd. v DCIT in ITA No. 1042(Del)/2()()5. dated 5 December 2008. It was held that the disallowance is of direct and all indirect expenses like administrative expenses and therefore the assessee's argument that no expenditure was incurred to make the investment, by itself does not lead to an inference that no expenditure was incurred. It was held: "The reason is that the management has to take investment decisions in accordance with the ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This aspect of the matter has also received careful attention of Chennai Bench of this Tribunal in comprehensive consideration of all the relevant aspects of the case including very strategic decisions in which lop management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. [Emphasis supplied] 3.9 Further, assuming without accepting, that the assessee has not utilized any of the borrowed funds to make investment, even then section 14A has to be invoked to disallow all the indirect expenses also. Considering the fact that such indirect expenses cannot be allocated to any specific head of income and also that the assessee does not maintain the accounts in such manner as to enable it to identify the expenditure relating to exempted income. the provisions of section 14A are attracted and accordingly are applied. 3.10. Even the methodology prescribed in Rule 8D to quantify the disallowance also supports this view. According to the Rule, disallowance will be the direct expenditure as well as the indirect expenditure estimated in the manner laid down therein. Thus clearly, it is the intention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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." From the above provisions/it would be clear that the mandate of Section 14A of the I.T. Act is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee. This Section is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the I.T. Act has to be disallowed under section 14A. Under Sub-Section (2) of Section 14, the AO 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. In the present case, although neither the AO nor the CIT has established the nexus between the expenditure and the exempted income (dividend) to work out the expenditure but for making disallowance the ld. CIT directed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it has been observed that the words "expenditure incurred" in s. 14A refer to expenditure on rent, tax. salary, interest etc. in respect of which allowances arc provided for. Thirdly, sub-ss. (2) and (3) were introduced by a legislative amendment brought about by the finance Act of 2006. The Memorandum Explaining the Provisions of the finance Bill of 2006 recognizes that the existing provisions of s. 14A did not provide a method of computing the expenditure incurred in relation to income which does not form part of the total income Consequently, there was a considerable amount of dispute between the taxpayers and the Department on the method of determining such expenditure. It was in view of these disputes that Parliament inserted a new sub-sec. (2) to permit the framing of subordinate legislation to provide a mandatory method for the AO to follow in determining the expenditure incurred in relation to income which does not form part of the total income, if the AO was not satisfied with the correctness of the claim of the assessee. The Memorandum provided that "this amendment will take effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Finance Act of 2006 w.e.f. 1st April, 2007 is that in a situation where the AO is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the non-taxable income, the AO would have to follow the method which is prescribed by the rules. The amendment rules were notified to come into force on 24th March, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently, r. 8D which has been notified on 24th March, 2008 would apply with effect from asst. yr. 2008-09. The rule consequently cannot have application in respect of assessment year 2002-03 which is the year under consideration in this ease." 10. It is true that the AO had not discussed about the expenditure relating to dividend income earned by the assessee. Therefore, the ld. CIT was justified in remanding the matter to the AO by invoking the provisions of section 263 of the I.T. Act, we approve the action of the ld. CIT however, the ld. CIT has directed the AO to apply the provisions contained in Rule 8D which are applicable from A.Y. 2008-09 as has been held by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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