9911796707
TMI Blog2013 (12) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... only the expenses incurred by the assessee for earning income of the said business are deemed to be allowed and nothing else - The income of the assessee from the business of operating ships having been computed in accordance with the provisions of Chapter XII-G, only the expenses incurred for the said business are deemed to have been allowed and no addition to such income can be made by way of disallowance under section 14A on account of any expenditure incurred in relation to earning of exempt dividend income – Decided in favour of assessee. - ITA No.4868/Mum/2011 - - - Dated:- 15-3-2013 - Shri B. Ramakotaiah Shri Sanjay Garg, JJ. For the Appellant: Shri M.M. Golvala Shri Sandeep Chetiwal, For the Respondent: Shri D.P. Sharma, DR Order B. Ramakotaiah (Accountant Member).- This is an appeal by the assessee against the orders of the Commissioner of Income-tax (Appeals)-9, Mumbai, dated March 24, 2011. The issue in this appeal is with reference to the disallowance amounting to Rs. 4,40,138 under section 14A. 2. Briefly stated, the assessee has disclosed dividend income of Rs.1,12,84,713 and claimed exemption under section 10(34). This amount comprises of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an the 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. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. 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. 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. Sub-rule (1) of rule 8D of the Income-tax Rules, 1962, has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under subrule (2)." (emphasis sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpt 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 under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D 31. As we have already noticed, sub-section (2) of section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 per cent. of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of the said Act. It is, therefore, clear that in terms of the said rule, the amount of expenditure in relation to exempt income has two aspects-(a) direct, and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above, and, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half per cent. of the average value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not permissible." 8. The coordinate Bench in the case of Justice Sam P Bharucha v. Addl. CIT in ITA No. 3889/Mum/2011 dated July 25, 2012 has analysed similar issue and came to the following conclusion : "5. We have considered the rival submissions as well as relevant material on record. Section 14A has within it implicit notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible activities in which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application. The objective of section 14A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words, when the Assessing Officer has not pointed out that certain expenditure is not incurred for earning the professional income ; but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of the Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. 5.3 In the case of Shri Pawan Kumar Parameshwar Lal v. ACIT this Tribunal has considered and decided an identical issue in para 4 as under : 4. After hearing the assessee in person and arguments of the learned Departmental representative we are of the opinion that no disallowance is called for under section 14A. Obviously the assessee is maintaining separate books of account f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to exempt income. Satisfaction of the Assessing Officer as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the Assessing Officer that it incurred a particular expenditure in respect of earning the exempt income and the Assessing Officer gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per rule 8D. From the assessment order, it is observed that the Assessing Officer simply kept the assessee's submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per rule 8D is automatic irrespective of the genuineness of the assessee's claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the Assessing Officer. The correct sequence, in our considered opinion, for making any disallowance under section 14A is to, firstly, examine the assessee's claim of having incurred some expenditure or no expenditure in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2010] 328 ITR 81 (Bom), it is apparent that first the Assessing Officer has to determine the claim of the assessee regarding expenses which neither the Assessing Officer nor the Commissioner (Appeals) has done in the instant case. In fact, the said decision goes against the Department itself in so far as their Lordships has held that the Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The Legislature directs him to follow rule 8D only where the Assessing Officer is not satisfied with the claim of the assessee." 11. After considering the principles laid down by various judgments, it is imperative that the Assessing Officer can invoke rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. 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 respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the income of the assessee from the business of operating ships is computed as per the special provisions contained in Chapter XII-G, only the expenses incurred by the assessee for earning income of the said business are deemed to be allowed and nothing else. It, therefore, cannot be said that when the income of the assessee from the business of operating ships is computed as per the special provisions of Chapter XII-G, any expenditure other than the expenditure incurred for the purpose of the said business has been allowed and consequently no addition to income so computed can be made by way of disallowance under section 14A on account of expenditure incurred by the assessee in relation to earning of exempt dividend income. We, therefore, find merit in the contention of the learned counsel for the assessee that the income of the assessee from the business of operating ships having been computed in accordance with the provisions of Chapter XII-G, only the expenses incurred for the said business are deemed to have been allowed and no addition to such income can be made by way of disallowance under section 14A on account of any expenditure incurred in relation to earning of exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
