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TMI Blog2017 (6) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... r calculating the amount disallowable u/s 14A of the Act was submitted by the assessee and the Ld. Assessing Officer without rejecting the report mechanically applied Rule-8D and computed the amount of disallowance, which cannot be said to be justified. At best, the disallowance may be restricted as suo-moto made by the assessee. Thus, no further disallowance was required to be made.- Decided in favour of assessee. TDS credit - Held that:- Two parties deducted TDS but did not hand over the TDS certificate to the assessee. It was also explained that the assessee wrote to the Assessing Officer of those parties with respect to this claim but there was no response from the Assessing Officer also. The Ld. Counsel relied upon section 205 of the Act. In such a situation, we remand this ground to the file of the Ld. Assessing Officer to examine the claim of the assessee and if felt necessary, The Ld. Assessing Officer may call report from the Assessing Officer of those parties, as prayed by the assessee. The ld. Assessing Officer may also send notices to the concerned parties and examine them with respect to deduction of tax at source, if so required. The assessee be given opportunity of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r making adjustment of suo-moto disallowance made by the assessee. It was further explained that own funds are much in excess of the borrowed funds for which our attention was invited to page- 8 of the paper book. Reliance was placed upon the decision in HDFC Bank Ltd. vs DCIT 383 ITR 529 (Bom.) and CIT vs Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.). It was further explained that the assessee is in the business of finance and the interest income is more than interest expenditure. Our attention was invited to page-14 of the paper book and the latest decision from Hon'ble jurisdictional High Court in the case of CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014 order dated 28/02/2017 and another decision in the case of Shri Paresh K. Shah (ITA No.8214/Mum/2011), order dated 05/06/2013. It was further explained that the conclusion of the assessee is on the basis of the decision of the accountant which is more scientific and rational, by further pleading that no defect was pointed out by the Assessing Officer/CIT(A). On the other hand, the Ld. DR, defended the conclusion of the Ld. Commissioner of Income Tax (Appeal) by placing reliance upon the decision in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted into the Act by the Finance Act, 2001 with retrospective effect from 01/04/1962. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. By virtue of the Finance Act, 2002, the following proviso was inserted in section 14A and was deemed to have been inserted with effect from 11/05/2001:- "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 year beginning on or before the 1st day of April, 2001." As a result of the insertion of the said proviso, Section 14A was as follows:- "Expenditure incurred in relation to income not includible in total income. 14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 year beginning on or before the 1st day of April, 2001. 3.4. By Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes (CBDT), in exercise of its powers under section 295 of the said Act read with subsection (2) of section 14A of the said Act, made the Incometax (Fifth Amendment) Rules, 2008 to further amend the said Rules (i.e., the Income-tax Rules, 1962) by introducing Rule 8D therein. Clause 1(2) of the Income-tax (Fifth Amendment) Rules, 2008 clearly stipulated that the rules would come into force from the date of publication in the Official Gazette. The said Rule 8D is as under:- "Method for determining amount of expenditure in relation to income not includible in total income. 8D.(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral operation, was not exigible to tax, therefore, any expenditure incurred in respect of that activity was not deductible. The Supreme Court repelled this contention in the following manner:- "This contention proceeds on the basis that only expenditure incurred in respect of a business activity giving rise to income, profit or gains taxable under the Act can be given deduction to and not otherwise. We see no basis for this contention. To find out whether the deduction claimed is permissible under the Act or not, all that we have to do is to examine the relevant provisions of the Act. Equitable considerations are wholly out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the amount claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) in respect of a business should be computed after deducting the allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble income, the entire expenditure in respect of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not exigible to tax, was not allowable as a deduction. 3.8. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the provisions of the Finance Bill 2001 which is to the following effect:- "Certain incomes are not includable while computing the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the nonexempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income, then the related expenditure is outside the ambit of the applicability of section 14A." 3.10. The Supreme Court also clearly held that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 of the said Act, cannot be allowed against any other income which is includable in the total income. The exact words used by the Supreme Court are as under:- "Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re used in the expansive sense. The Supreme Court further observed as under:- "49. The expression in relation to (so also pertaining to ), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context…" "… In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term relate is also defined as meaning to bring into association or connection with. It has been clearly mentioned that relating to has been held to be equivalent to or synonymous with as to concerning with and pertaining to . The expression pertaining to is an expression of expansion and not of contraction." (emphasis supplied) 3.14. Hon'ble Punjab & Haryana High Court in the case of CIT-II v. Hero Cycles Ltd., decided on 4/11/2009, observed that:- "Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand." 3.15. We are of the view that unless and until ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. 3.17. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. (iii) The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14A remained an empty shell until the introduction of Rule 8D on 24/03/2008 which gave content to the expression such method as may be prescribed appearing in Section 14A(2) of the said Act. Thus, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. 3.22. So far as, as to how Section 14A to be worked for the period prior to the introduction of Rule 8D, is concerned. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with such method as may be prescribed . Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 8.74 lakhs as indirect expenses, therefore, we find merit in the claim of the assessee. As mentioned earlier and argued by the ld. counsel for the assessee, the assessee was having own funds, which was in far excess of borrowed funds, therefore, mechanically no disallowance can be made. The Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. (supra) held as under:- "The very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over ₹ 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, the balance sheet as of 31st March, 1999 is nor relevant. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the counsel has been unable to point out from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. The P&L a/c and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that both in the order of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Tribunal has an observation therein that there is no such thing as estoppel in law and by virtue of that gives itself a licence to decide the issue before it ignoring the binding precedent in the petitioner's own case in HDFC Bank Ltd(supra). Once there is a binding decision of HIGH Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larger bench of this Court takes a view different from the one already taken. (Para22) For the purposes of certainty, fairness and uniformity of law, all authorities within the State are bound to follow the orders passed by us in all like matters, which by itself implies that if there are some distinguishing features in the matter before the Tribunal and, therefore, unlike, then the Tribunal is free to decide on the basis of the facts put before it. However till such time as the decision of this court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering a like issue. In case HIGH Court are wrong, the aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Assessing Officer to estimate a part of expenditure, incurred by the assessee, to produce nontaxable income. To elaborate further, the word incurred refers to factual spending of expenditure in relation to exempt income and does not refer to deemed spending or assumed spending for the purpose. While applying the section, there is no authority conferred by the section upon Assessing Officer to deem or assume certain expenditure to have been incurred in relation to tax free income. The proximity cause of disallowance u/s 14A is its relationship with the tax exempt income. Wherever the expenses incurred has no relationship with the income not includible in the total income, there cannot be any occasion to invoke the provision for making the disallowance u/s 14A of the Act. In the light of the foregoing discussion, it can be concluded that the expenditure, which can be disallowed u/s 14A should be actually incurred. 3.26 So far as, the expression satisfaction is concerned, it postulates a bona-fide belief about the incorrectness of the claim of the assessee and existence of objective reason for such belief. Further, this expression also does not mean a purely subjective satisfac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilized for the purpose of making investment in the shares. 3 The only issue arising from the appeal of the assessee is whether in the facts and circumstances of the case, the Commissioner of Income Tax(Appeals) is justified in confirming the disallowance made by the Assessing Officer u/s 14A of ₹ 17,65,069/- by applying Rule 8D of the I T Rules. 3.1 During the course of assessment proceedings, the Assessing Officer proposed to make the disallowance u/s 14A on account of interest expenditure as well as administrative expenditure by applying Rule 8D of the I T Rules. The assessee contended before the Assessing Officer that the assesssee's own fund is sufficient for making the investments in the shares. It was further contended that the investments in the shares made in the sister concern of the assessee with a view to have control over the affairs of the sister concern and not for earning the dividend income. It was further contended that the interest income is more than the interest expenditure; therefore, no disallowance is called for u/s 14A. 3.2 The Assessing Officer did not accept the contention of the assessee and made the disallowance on account of interest u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer had not made any disallowance u/s 14A on account of interest expenditure in the earlier year; therefore, in the absence of fresh investment during the year, no disallowance can be made on account of interest by applying the provisions of sec. 14A. Further, the assessee earned the interest income of ₹ 42,17,981/- against the interest & brokerage expenditure of Rs.. 30,79,450/- . This net interest expenditure offered to tax by the assessee is ₹ 11,38,531/- which show that interest income is more than the interest expenditure and therefore, it cannot be presumed that borrowed fund was utilised for the purpose of making the investments in the shares. 5.2 In view of the above facts and circumstances of the case as well as the decision of the Hon'ble Jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd. reported in 313 ITR 340, we are of the opinion that no disallowance is called for u/s 14A on account of interest expenditure." In the light of the foregoing discussion, we find that neither the Ld. Assessing Officer nor the Ld. Commissioner of Income Tax (Appeal) pointed out any defect in the accounts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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