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TMI Blog2014 (2) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in respect of such expenditure. The assessee made detailed submissions to the Assessing Officer that the determination of disallowance u/s 14A of the Act was based on the employee costs and other costs involved in carrying out this activity - assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized - All the points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is "not acceptable" - the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable – thus, the order set aside and the matter remitted back to the AO for fresh adjudication – Decided in favour of Assessee. - ITA No. 1733/PN/2012 - - - Dated:- 30-1-2014 - Shri Shailendra Kumar Yadav And Shri G. S. Pannu,JJ. For the Appellant : Mr. Nikhil Pathak For the Respondent : Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to record a satisfaction about the in-correctness of the claim of expenditure made by the assessee in relation to the exempt income, because in the present case assessee had suo motu disallowed a sum of Rs.5,00,000/- as having been incurred in relation to the exempt dividend income. The assessee further justified the quantum of disallowance of Rs.5,00,000/- by pointing out that most of the investments which have yielded the exempt income were made in preceding years and the other investments were made out of profits for the year under consideration and therefore the amount of disallowance made by the assessee on an application of section 14A of the Act was adequate. It was also pointed out before the CIT(A) that in assessee's own case for assessment year 2007-08, it has been held that 5% of the exempt income can be considered as a fair and reasonable estimate of expenditure incurred for earning such income and if it is so applied for the year under consideration the disallowance u/s 14A of the Act could at best be to the tune of Rs.27,27,934/-. Apart from the aforesaid, assessee asserted before the CIT(A) that there is a composite business consisting of activities generating tax- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have been partly accepted, inasmuch as the Assessing Officer has accepted the plea of the assessee that there was no interest expenditure incurred in relation to the exempt income as there was no disallowance made out of interest expenditure as per clause (ii) of sub-rule (2) of rule 8D of the Rules. The learned counsel pointed out that no reason has been advanced by the Assessing Officer as to why he has rejected the assessee's claim of the disallowance of Rs.5,00,000/- u/s 14A of the Act. Further, explaining the factual position a reference was made to para 4.3.1 of the order of the CIT(A) wherein is reproduced the explanation furnished by the assessee. On that basis it is sought to be made out there was no fresh investments made during the year in shares which would result in exempt income. The said proceeds of mutual funds were invested in buying of debentures, which in any case resulted in taxable interest income. It was, thus, pointed out that all the investments which have yielded exempt income have been made in the past year and there was no fresh investments made and therefore it would show that the only expenditure which can be relatable to such income would only relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra) :- "70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where 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. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). [underlined for emphasis by us] 9. The aforesaid observations of the Hon'ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the claim of the assessee that an expenditure of Rs.5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre-condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that "the said disallowance was not acceptable". In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of disallowance u/s 14A of the Act of Rs.5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year un ..... X X X X Extracts X X X X X X X X Extracts X X X X
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