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TMI Blog2015 (11) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee firm from any of his employees to which provisions of sub-clause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees’ account in the relevant fund or funds on or before the “due date” mentioned in explanation to section 36(1)(va). - Decided against assessee. Disallowance u/s.14A read with Rule 8D - Held that:- First requirement of law is that the expenditure should be related to the exempt income. In case, where the assessee makes a claim that ‘x’ amount is related to the exempt income or otherwise no expenditure is related to the exempt income, in that event, the AO has to satisfy himself about the correctness of the claim having regard to the accounts of the assessee before proceeding to apply Rule 8 D of the Income Tax Rules, 1962 for computing disallowance. Hence, another requirement of law is that the AO has to satisfy himself about the correctness of the claim of the assessee having regard to the accounts of the assessee. The provision of section 14A mandates the AO to examine the accounts of the assessee before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 lacs made on account of disallowance out of fees and legal expenses. Ld. Sr. D.R., Shri Narendra Singh vehemently argued that ld. CIT(A) was not justified in deleting the addition. He submitted that the Assessing Officer had given finding on the basis of that payments have been recently introduced. The agreement between the two concerns under the same management is loosely worded and does not have any outlined detailed nature, purpose and justification of the amount in question. He submitted that the Assessing Officer has observed that assessee has not submitted any detail of services rendered by the employees other than mentioning in general that the secretarial work of the company has increased. Further, it has also not been evidenced that the employees are solely at the disposal of the assessee company. On the contrary, ld. Counsel for the assessee submitted that the finding of the Assessing Officer is misplaced. Ld. Counsel reiterated the submissions as were made before the CIT(A). 7. We have heard the rival contentions and perused the material available on record. We find that the ld. CIT(A) has decided the issue in para-5.2 by observing as under: 5.2 I have carefull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) in A.Y. 2007-08 had deleted the disallowance. This fact has not been disputed by the Revenue. Ld. Counsel for the assessee had pointed out that the co-ordinate Bench of this Tribunal in ITA No. 45/Ahd/2011 has confirmed the finding of the ld. CIT(A). We find that the co-ordinate Bench in ITA No. 45/Ahd/2011 for A.Y. 2007-08 has confirmed the order of ld. CIT(A) in para 13 by observing as under: 13. We find that no specific mistake in the findings of the Ld.CIT(A) could be pointed out by the Ld. DR. We find that the genuineness of the payment is not in dispute. The Assessing Officer after observing about the loss incurred by the assessee company has brought no material on record after making investigation to show that the assessee has not received the services for which payments were made by the assessee. Rather, on the other hand, the allowance f deduction at the rate of 50% shows that the Assessing Officer also agreed that services of the staff of the payee company were utilized by the assessee company for its business purpose. No material was brought on record to show that the consideration for services received by the assessee was so excessive as to warrant any di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent s case, the Ld. CIT(A) erred in confirming the disallowance u/s.14A read with Rule 8D for ₹ 7,61,9087-, when no such disallowance is called for. He ought to have deleted the entire addition of ₹ 8,61,908/-. 2. In law and in the facts and circumstances of the respondent s case, the Ld. CIT(A) erred in solely relying on the decision of Godrej Boyce Manufacturing Co. Ltd. vs. DCIT and Another, by not considering the ratio laid down by other judicial pronouncements available on the issue on which the appellant had relied. In view of the various judicial pronouncements cited by the appellant before the CIT(A), the confirmation of addition of ₹ 7,61,9087- made by him U/S.14A r.w. Rule 8D, deserves to be deleted. 3. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds either before or during the course of hearing of the appeal. 12. The only effective ground is against the confirmation of disallowance made u/s.14A read with Rule 8D of ₹ 7,61,908/-. Ld. Counsel for the assessee submitted that authorities below were not justified in making disallowance and confirming the same. Ld. Counsel for the assessee reiterate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctness 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 this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act [Emphasis supplied] From perusal of the above, it can be inferred that section 14A is applicable only when: (i) The taxpayer generates an income which is exempt from tax. (ii) For earning such income some expenditure has been incurred. (iii) Provisions of Rule 8D can be invoked only when having regard to the accounts of the assessee, the Assessing Officer is not satisfied with the correctness of the claim of assessee in respect of such expenditure. In the above context, the appellant would like to submit that the impugned disallowance of expenditure was made by the Assessing Officer, which was confirmed by the Ld. CIT(A), by simply assuming that the appellant had incurred some expenditure to earn exempt income, however, while doing so, he has failed to establish a pre-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Rule straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The satisfaction of the Assessing Officer must be arrived at on the objective basis. In the light of the aforesaid observation of the court, it would be seen that the Ld.CIT(A) casually followed the decision of Mumbai High Court cited supra without considering the detailed observations given in the judgment. In fact, the aforesaid Mumbai High Court decision is normally quoted and relied upon in the following two areas:- (i) The provisions of Sub-ss. (2) (3) of Sec. 14A are constitutionally valid and the provisions of Rule 8D of the IT. Rules are not ultra-virus the provisions of Sec.14A and do not offend Article 14 of the Constitution; (ii) The provisions of Rule 8D of the I.T. Rules which have been notified with the effect from 24th March 2008 shall apply w.e.f. A.Y. 2008-09 and not prior to that. 4. The appellant submits that various courts have been taking a consistent view that disallowance u/s.14A can be made only if there is an actual nexus between tax-free inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and investment in shares yielding taxfree income but, made disallowance on day to day working product method - Whether nexus between borrowed funds and investment can be said to be established only where it is shown that interest free fund are not available with assessee - Held, yes - Whether since Commissioner(Appeals) had merely picked up sources on which interest was paid by assessee and had completely ignored other sources and further that interest free funds were available to assessee for making investment which far exceeded investment in shares order of Commissioner (Appeals) was to be set aside and, addition was to be deleted - Held, yes. [Emphasis supplied] On perusal of the above judicial decisions , it may be concluded that It is the onus of the Assessing Officer to establish a nexus between the expenditure incurred and the source of exempt income, in the event he wants to disallow u/s 14A of the Income Tax Act, 1961. In the facts of the case, no nexus whatsoever has been established by the Assessing Officer. Thus, disallowance made by assessing officer u/s 14A requires to be deleted. 5. Without prejudice to what is stated herein above, and with regard to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had enough interest-free funds at its disposal for investment and accordingly deleted the addition of ₹ 4.40 cores made by the Assessing Officer and directed him to allow the deduction under section 36(1)(iii). The order of the Commissioner (Appeals) was upheld by the Tribunal. On appeal to the High Court: Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. EAST INDIA PHARMACEUTICAL WORKS LTD. v. CIT [1997] 224 ITR 627 (SC) and WOOLCOMBERS OF INDIA LTD. v. CIT [1982] 134 ITR 219 (Cat) relied on. [Emphasis supplied] (b) Decision of the ITAT, Ahmedabad, in ACIT v Hipolin Ltd. (ITA No. 4259/Ahd/2007): 2. The brief facts of the case are that the appellant is engaged in the business of manufacturing of washing powder, detergent cakes, too ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant itself has shown ₹ 1,00,000 expenditure incurred in investments made by it in the shares and mutual funds and the income earned there from. In fact, the Ld.CIT(A) has not negativated the claim of the appellant relating to expenses of ₹ 1,00,000. Not only this, the Assessing Officer has not challenged the correctness of the said claim with facts figures and the Ld.CIT(A) has also considered the said expenditure of ₹ 1,00,000 and deleted to the above extent, out of the addition of ₹ 8,61,908, which resulted into confirmation of addition of ₹ 7,61,908. Here the Assessing Officer was required to find out and quantify the expenses incurred by the appellant for earning exempted income by establishing a proper nexus between the two. In fact, there was no need of application of Rule 8D, as the appellant had already shown the administrative expenditure incurred during the year at ₹ 1,00,000. The appellant relies on the following two decisions available on the matter- (1) Decision of Third Member division of Delhi ITAT in case of Wimco Seedlings Vs. DCIT 109 TTJ 462; (2) Decision of Delhi ITAT in case of Malwa Investments Limited Vs. DICT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form part of the total income under this 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 this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.] 13.2. From the conjoint reading of the above provision, it is evident that making of disallowance by applying Rule 8-D of the Income Tax Rules, 1962 is not automatic. The AO has to first find out what was the expenditure incurred by the assessee in relation to the income which does not form past of the total income under the Act (hereinafter refer to as the exempt income). Therefore, firstly the AO is required to find out the nexus between the expenditure incurred and exempt income. If the expenditure is not related to the exempt income, in our considered view the AO is not empowered to make disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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