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TMI Blog2010 (10) TMI 1068X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, we feel the matter should be restored to the AO for making disallowance u/s 14A by reasonably estimating as nearly as possible the expenditure incurred for earning the tax free income. This should be done after giving opportunity to the assessee-Banks to suggest their own formula with reference to accounts for the purpose of arriving at the actual amount or near actual amount. The disallowance on estimated basis has to be done as above until rule 8D was framed and thereafter it is for the AO to make disallowance by following sub-section (2) of section 14A and rule 8D of the Income-tax Rules. Regard to disallowance of administrative expenditure - HELD THAT:- considering the fact that there is no precise formula for proportionate disallowance, no disallowance is called for, for proportionate administrative cost attributable to earning of tax free income until rule 8D came into force. We, therefore, dispose of the appeals by setting aside the orders of the Tribunal and that of the first appellate authority on this issue and remand all the assessments back to the AO for reworking disallowance u/s 14A in the case of each assessee for each assessment year. The proportionate dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed to achieve finality. Disallowance under section 14A was intended to be made only for pending assessments and for assessments for the assessment years commencing from 2001-02 onwards. In all these cases disallowance made under section 14A are either in pending assessments or for assessments for the assessment years commencing from 2001-02 onwards. No dispute is raised by the assessees against application of section 14A by virtue of operation of the proviso to the said section introduced by Finance Act, 2002. Admittedly none of the assessee-Banks have separate accounts for the investments made in bonds, securities and shares wherefrom tax free income is earned so that disallowance could be limited to the actual expenditure incurred. In other words, the assessee-Banks do not have separate accounts for the expenditure incurred towards interest paid on funds borrowed such as deposits utilised for investments in securities, bonds and shares which yielded tax free income. The position is same so far as the overhead and administrative expenditure of the assessee is concerned. In the absence of separate accounts for investments which earn tax free income, the Assessing Officer worked ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not 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: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment J year beginning on or before the 1st day of April, 2001. It has to be noted that sub-sections (2) and (3) were introduced to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred for earning income that do not constitute total income of the assessee, should not be allowed. In other words, when income is outside the tax net, expenditure incurred for earning such income also should not be allowed to be set off in the computation of taxable income. Therefore, the short question to be considered is whether non-maintenance of separate accounts by the assessee with regard to expenditure incurred for earning non-taxable income is justification for them to claim immunity from the operation of section 14A. In fact, the subsequent legislation i.e. introduction of sub-section (2) and the prescription of rule 8D thereunder, make it clear that there may be cases where it would be difficult for assessees to maintain separate accounts for earning taxable as well as non-taxable income. However, what we feel is that such difficulty may be experienced in the case of overhead expenditure and administrative expenditure incurred by the assessee-Banks. So far as investments in securities and bonds and also in shares, the income wherefrom is tax free are concerned, we see no reason why assessee could not have maintained separate accounts for the sources of fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because in the first place, facts and figures are not available. Further, the assumption of the Assessing Officer that the entire investments in bonds, shares and securities for earning tax free income is from out of borrowed funds (deposits) is also not justified. Assessee-Banks have a specific case that they have funds available with them which are neither borrowals nor interest bearing deposits and such funds also have been utilised in making investments for earning tax free income. We find force in this contention because when accounts are not available, the disallowance could be made only on the expenditure incurred for earning the tax free income which is to be estimated on a rational basis. In fact, in our view, the Assessing Officer could have taken the following formula to arrive at the interest liability incurred by the assessee-Banks to earn interest free income: Total interest liability Tax free income earned by the assessee Total income 5. What we have stated above is only a reasonable suggestion for the Assessing Officer to adopt which arises only if assessee is not able to establish more accurately the interest spent on earning tax free income. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X
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