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TMI Blog2014 (6) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... see is not forthcoming with the expenditure incurred by it to earn to exempt income, a procedure has been prescribed by the statute which has been followed in this case and the disallowance has been calculated as per the prescribed method envisaged in Rule 8D and the assessee has failed to show any mistake in the calculation made under the Rule so the order need not be disturbed. Even 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 Act, the officer exercising jurisdiction, while assessing the assessee will have to verify the correctness of the claim - If the assessee’s reply/ explanation are not acceptable for the authorities then it shall state reasons and after recording his dissatisfaction, shall reject the claim - the authorities have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act - CIT(A) exercised his co-terminus power and after recording his dissatisfaction as to the claim of the assessee in respect to expenditure in relation to exempt income has computed the expenditure as provided under Rule 8D as one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rutiny assessment the AR has produced the books of account which have been examined on test check basis. Since the assessee in its return of income has declared a dividend income of Rs. 2,71,83,864/- which has been claimed as exempt, the assessee was asked to explain as to why expenses incurred for earning dividend income not be disallowed as per the provision of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter 'the Rules'). Pursuant to the said query of the Assessing Officer the assessee replied that Rule 8D is not applicable since there is no nexus of expenses debited to profit and loss account and the exempt income and therefore the provision of Section 14A read with Rule 8D are not applicable. It was also submitted by the assessee before the Assessing Officer that the company had not incurred any expenses for earning exempt income; And the exempt income is only in the form of Dividend from Mutual Funds and the Mutual Funds are not purchased from any borrowed fund on which any interest is paid and the expenses/ expenditure debited in the profit and loss are in no manner was connected/ incurred with the exempt income and hence, the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he books of accounts of the assessee. Rule 8D of the Rules is the method of computation prescribed for the purpose of said section. It was submitted by the counsel that the assessee during the year has not incurred any expenditure directly or indirectly towards earning exempt dividend income. The ld counsel, Shri Salil Agarwal, strenuously argued that even after insertion of rule 8D the disallowance u/s 14A of the Act cannot be made unless the Assessing Officer is satisfied having regard to the accounts of the assessee that expenses was incurred in relation to exempt dividend income. Therefore, it was submitted by him that having regard to the books of account of the assessee and on the facts of the case, no satisfaction towards incurring of expenditure in earning exempt dividend income could have been reached by the Assessing Officer, and so resultantly no disallowance on account of expenditure which has not been incurred cannot be computed against the assessee. The ld counsel stated that the AO has not recorded his satisfaction about the correctness of the claim in this respect by the assessee before proceeding to apply Rule 8D and non-recording of the satisfaction vitiates the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the said grievousness of the assessee, has exercised his co-terminus power as held by the Hon'ble Supreme Court in Kanpur Coal Syndicate and after giving opportunity to the assessee to explain again as to why disallowance u/s 14A read with Rule 8D be not made, since application of the prescribed method is mandatory for the relevant Assessment Year and thereafter the ld CIT(A) after considering the reply of the assessee, recorded the satisfaction as envisaged in the statute and thereafter computed the disallowance at Rs. 13,82,741/- being 0.5% of average investment as is prescribed U/Rule 8D (2)(ii). The ld DR further stated that the legislative intention was to avoid disputes with regard to allocation of the expenditure relating to exempt income and Rule 8D has been prescribed for this, which is applicable in the year under consideration. According to the ld DR, once Rule 8D is applicable, the assessee can point out a mistake, if any, in the working made by the Assessing Officer in respect of Rule 8D. However, without pointing out any such mistake, the assessee cannot claim that no disallowance u/s 14A is required to be made. The ld DR pointed out that the Division Bench of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of amount of expenditure incurred in relation to exempt income only if he records a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) of Section 14A further extends the scope of sub-section (2) and the Assessing Officer is required to record the similar finding even where the assessee claims that no expenditure has been incurred by him in relation to the exempt income. Therefore, the contention of the ld counsel, that before proceeding to make the disallowance u/s 14A, the Assessing Officer has to record his satisfaction as required by sub-section (2) & (3) of Section 14A, is accepted. 10. Now the question is whether the Assessing Officer's non-recording of satisfaction in explicit terms in respect to the claim of the assessee, vitiate the addition made u/s 14A read with Rule 8D. Here we find that Assessing Officer in his assessment order had asked the assessee to explain as to why expenses for earning dividend income not be disallowed as per the provision of Section 14A. After taking note of the assessee's reply dated 03.12.2010 & 15.12.2010 (which has been reproduced in the assessment order), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld CIT(A) has exercised his co-terminus, plenary power enjoined to him as an appellate authority as held by the Apex Court in Kanpur Coal Syndicate (supra) and after giving fresh opportunity to the assessee to explain before him why disallowance u/s 14A read with Rule 8D be not made in its case and after receipt of the reply/ explanation from assessee, then only the ld CIT(A) has recorded his satisfaction as envisaged by Section 14A and thereafter computed the disallowance as per Rule 8D. It would apposite to reproduce the relevant paragraph of the order of the ld CIT(A), and the same is reproduced below. "5.3 In the instant case, since Assessing Officer has invoked Rule 8D, it is thus implied that, he was not satisfied with the correctness of the claim of the appellant. In any case, since it is well settled that, powers of the CIT(A) are co-terminus with that of the Assessing Officer, as has been held by Hon'ble Supreme Court in the case of Kanpur Coal Syndicates Vs. CIT reported in 53 ITR 225, the appellant was given another opportunity to explain as to why disallowance under Section 14A read with Rule 8D be not made, as from Assessment Year 2008-09, this rule is mandatory in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionaries of the appellant company and some other officials must be there to have a liaison with banking authorities. No prudent businessman (who is going to invest a substantial sum of money on investment) will leave decision entirely on a third party with no stakes. Accordingly, the plea of the appellant that they have not incurred any expenditure in deploying a huge funds of Rs. 36.19 croes during the year is not acceptable at all. Hence in the absence of any information, from Assessment Year 2008-09, the Assessing Officer (and CIT(A) in view of his co-terminus power with that of Assessing Officer) is bound to compute disallowance u/s 14A read with Rule 8D. Accordingly, by applying the same, I compute the disallowance u/s 14A/Rule 8D at Rs. 13,82,741/- being (0.5% of average investments) as is warranted under Rule 8d(2)(ii)." 11. From a perusal of the above, we find that ld CIT(A) while exercising his appellate jurisdiction has exercised his co-terminus power with that of Assessing Officer and has recorded his dissatisfaction with the correction of the claim of the assessee that no expenditure was incurred in relation to 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 ..... and the disallowance has been calculated as per the prescribed method envisaged in Rule 8D and the assessee has failed to show any mistake in the calculation made under the Rule so the order need not be disturbed. 13. Since we have found that the requirement of sub-section (2) of Section 14A has been satisfied by the authorities below, now the question is about the validity of the amount determined by the revenue as expenditure in relation to exempt income under Rule 8D. It may be taken note that Rule 8D has been introduced to avoid the dispute with regard to allocation of the expenditure between the exempt income and taxable income. When one examines sub-Rule (2) of Rule 8D, we find that the 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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