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TMI Blog2012 (9) TMI 467X X X X Extracts X X X X X X X X Extracts X X X X ..... .N. Shastry Smt. Surjani Mohanty, Sr. DR O R D E R PER CHANDRA MOHAN GARG, JUDICIAL MEMBER Both these appeals have been filed by the assessee against the order of CIT(A)-XII, New Delhi dated 4.8.2010 for A.Y. 2007-08. The grounds of appeal in both the appeals are same, therefore, for the sake of convenience, these are being disposed of by this common order. The grounds of appeal in both the appeals are reproduced as under:- 1. The CIT(A) has erred in confirming the disallowance made by the ld. AO under Rule 8D read with Section 14A of the Income Tax Act, 1961. 2. The CIT(A) has erred in confirming the addition made by the AO despite the fact that no nexus has been established between the expenses alleged to be incurred for earning of tax exempt income. 3.1 That both the authorities below have not able to find any specific fault in the allocation made by the appellant or the basis. 3.2 The disallowance u/s 14A has been made by applying Rule 8D in a mechanical manner resulting in absurd conclusions and contrary to the stand of the department regarding allocation of expenses incurred for earning of interest and dividends in the earlier years. 4. Interest ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 111 ITD 53(Del).(SB) is cited in support of the proposition that the provision of Section 14A can be invoked by the appellate authorities even though, the same was not applied by the lower authorities. 4. The ld. CIT(A) concluded and upheld the disputed disallowance with the following observations:- The Special Bench observed that procedure and mechanism for working out expenditure in relation to income which is exempt is governed by Rule 8D which prescribes the method by which the AO has to determine the disallowance of expenditure as relatable to the exempt income. Further in the case of M/s Cheminvest Ltd. vs ITO as reported in 317 ITR, the Special Bench, Delhi has observed that in case where dividend income is exempted from tax, regardless of whether, shares are held as investment or as a stock in trade, expenditure incurred to earn the dividend is to be disallowed irrespective of the fact was whether any dividend income was earned or not during the year. Following the above two decisions of the Special Bench, the disallowance of Rs.46,49,831/- is upheld. 5. We have heard rival arguments of both the parties and carefully perused the record before us. The couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing but an offshoot of sub-section (2) of Section 14A. Subsection (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 relation to such income which does not form part of the total income und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Gupta, the learned counsel, who had appeared for some of the assessees, submitted that Section 295 of the said Act empowered the Central Board of Direct Taxes to make rules for the whole or any part of India for carrying out the purpose of the said Act. He referred to sub-section (4) of Section 295 and submitted that the power to make rules conferred on the Central Board of Direct Taxes included the power to give retrospective effect, from a date not earlier than the date of the commencement of the said Act, to the rules or any of them and, unless the contrary was permitted (whether expressly or by necessary implication), no retrospective effect was to be given to any rule so as to prejudicially affect the interests of the assessees. He further submitted that Rule 8D was inserted in the said rules, but the Central Board of Direct Taxes did not make it retrospective. He submitted that whenever the CBDT felt it necessary to introduce a rule with retrospective effect, it did so by making the rule expressly retrospective. As an example, he referred to Rule 11EA which was inserted by the Income-tax (Ninth Amendment) Rules, 1997 with retrospective effect, from 01/10/1994. 34. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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