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TMI Blog2016 (5) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the order of assessment framed us 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. The only issue to be decided in this appeal is as to whether the disallowance u/s 14A of the Act could be made in the facts and circumstances of the case. 3. The brief facts of this issue is that the assessee derived dividend income of ₹ 12,51,249/- . No disallowance of expenditure incurred in relation to such exempt income was made by the assessee. Therefore, the Learned AO invoked the provisions of section 14A of the Act read with Rule 8D of the IT Rules. The Learned AO applied Rule 8D(2)(iii) being 0.5% of average value of investments and disallowed a sum of ₹ 9,89,313/- u/s 14A of the Act. It was argue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mently supported the order of the lower authorities. 5. We have heard the rival submissions. We hold that the Learned AO without appreciating the various contentions raised by the assessee had mechanically applied the provisions of Rule 8D(2)(iii) of the IT Rules without recording his satisfaction in terms of Rule 8D(1) of IT Rules as to why the contention of the assessee that no expenditure was incurred for earning exempt income is incorrect having regard to the accounts of the assessee. The language of Rule 8D(1) is very clear in this regard. We place reliance on the following decisions in this regard:- (a) Decision of the co-ordinate bench of Mumbai Tribunal in the case of Fali S Nariman vs Addl. CIT reported in (2015) 56 taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of having incurred a lower expenditure than that per the statutory prescription of r. 8D, thereon. The expenditure observed as relatable to the income not forming part of the total income by the Revenue are : salary (Rs. 3.54 lacs); printing and stationery (Rs. 0.11 lacs); and bank charges (Rs. 0.10 lacs), without specifying the relationship, so that the same is inferably casual. Even the claim of depreciation (Rs. 7.26 lacs) we observe as principally on law books. The ingredients of s. 14A(2) r/w r.8D(1) are clearly not satisfied in the instant case. We accordingly find no infirmity in the assessee s claim of disallowance u/s 14A(1) at ₹ 1,00,000/- . We decide accordingly. (b) Decision of the co-ordinate bench of Kolka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no disallowance under section 14A can be made. 7. Now coming to the merits of the issue. A perusal of the provision of section 14A(1) clearly shows the wordings, in relation to the income which does not form part of the total income under this Act . In the present case, this income, which does not form part of the total income under the Act, is the dividend income of ₹ 1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of ₹ 1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being where the Assessing Officer, is not satisfied with. (a) .. (b) .. in relation to income ., he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). In the assessee s case, admittedly, the assessee has substantial capital. The increase in the capital itself is to an extent of ₹ 4 crores and in respect of reserves and surplus, the increase is ₹ 112 crores. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case . In view of the aforesaid facts and circumstances and respectfully following the various judicial precedents relied upon hereinabove, we hold that the addition u/s 14A of the Act could not be made without recording satisfaction in terms of Rule 8D(1) of the IT Rules. Accordingly, the grounds raised by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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