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TMI Blog2014 (9) TMI 791X X X X Extracts X X X X X X X X Extracts X X X X ..... e which does not form part of the total income could not be debited to the profit or loss account in view of the provisions of Section 14A of the Act – This constituted a clear fulfillment of the requirement in sub-section (2) of Section 14A as well as sub-rule (1) of Rule 8D that the AO was not satisfied with the correctness of the claim of the assessee, on the basis of the accounts of the assessee The order of the Tribunal to the extent to which it confirms the disallowance to the extent of ₹ 96,000/- is unexceptionable - The Tribunal has deleted the disallowance to the extent of ₹ 66.79 lacs on the ground that on this aspect the borrowed funds were used for business purposes and no part thereof was used for making investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of other expenditure to the extent of 0.5% of average value of investment, when the Assessing Officer had not brought any material or evidence on record to establish that any expense was incurred to earn any tax free income and had also not recorded any satisfaction to the effect that the claim of the assessee that no such expenditure had been incurred was not correct; and (ii) Whether ITAT is justified in adding the proportionate disallowance of ₹ 0.96 lac under Section 14A in computing the book profit when the Assessing Officer has neither discussed nor mentioned any reason or justification for making such addition. The Assessing Officer, in an order of assessment under Section 143(3) of the Act, observed that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.66.79 lacs II. 0.05% of average value of investment of which income does not form part of total income Rs.0.96 lacs Total amount of disallowance Rs.67.75 lacs The assessee filed an appeal before the CIT (A). By an order dated 26 May 2011, the CIT (A) deleted the disallowance. In appeal, the Tribunal affirmed the deletion of the disallowance to the extent of ₹ 66.79 lacs (out of a disallowance of ₹ 67.75 lacs made by the Assessing Officer under Section 14A) but confirmed the disallowance to the extent of ₹ 96,000/-. The Tribunal has observed that the entire borrowed fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure which is incurred 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, if 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 in relation to income which does not form part of the total income under the Act. Rule 8D of the Rules provides for method which is to be used for determining the amount of expenditure in relation to income not includible in the total income. Rule 8D provides as follows: 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Now at this stage, it would be necessary to note that to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act, by applying the method which is prescribed in Rule 8D, the Assessing Officer must not be satisfied with the correctness of the claim of the assessee, having regard to the accounts of the assessee. The same provision is contained in sub-rule (1) of the Rule 8D which stipulates that the Assessing Officer, if he is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case, the Assessing Officer has noted that the assessee had invested a certain amount of its funds in shares and that the dividend which has been received or receivable did not form part of the total income. The Assessing Officer noted that there were certain expenses on account of interest etc. which were directly attributable to the exempt income. The assessee had debited the entire expenditure to the profit or loss account. The Assessing Officer noted that since the exempt income does not form part of the total income, the expenditure which is directly related to income which does not form part of the total income could not be debited to the profit or loss account in view of the provisions of Section 14A of the Act. This, in our view, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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