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TMI Blog2017 (9) TMI 1573X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer, the same has been rectified by the Commissioner of Income-tax (Appeals) in the appellate order, when it has discussed everything in detail justifying as to why exemption of expenditure claimed by the assessee was rightly disallowed by the Assessing Officer. In our view, jurisdiction to apply section 14A of the Act, 1961 contemplates satisfaction of condition precedent therein, on the part of the Assessing Officer. If he has illegally exercised jurisdiction, the same cannot be said to have been rectified by order passed by the appellate authority inasmuch as the order of the assessing authority itself being illegal as statutory mandatory condition was not satisfied, such illegality could not have been cured by order passed by the appellate authority.- Decided in favour of assessee. - Income Tax Appeal No. 80 of 2015 - - - Dated:- 15-2-2017 - Sudhir Agarwal And Anant Kumar, JJ. For the Appellant : Manish Misra For the Respondent : D. D. Chopra JUDGMENT 1. Heard Sri Manish Misra, learned counsel for the appellant and Mr. D.D. Chopra, learned counsel for the respondent. 2. This is an appeal at the instance of the Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company registered under the Companies Act, 1956 (hereinafter referred to as the Act, 1956 ) owned by the State of U.P. and therefore is a U. P. Government company. It is engaged in promotion of electronics industry and imparting computer training in the State of U. P. Its activity also included trading activity, computer hardware and other peripherals. This is also registered as a non-banking finance company (investment company). The assessee filed original return for the assessment year 2009-10 on September 30, 2009 declaring total income as nil, income for calculation of tax under section 115JB of the Act, 1961 at ₹ 47,23,798. It revised return on March 31, 2011 showing book profit at ₹ 55,72,210 through CASS. The return was selected for scrutiny. Consequently, notices under sections 143(2) and 142(1) of the Act, 1961 were issued on April 19, 2011 and June 1, 2011, respectively. 5. The assessee claimed dividend income of ₹ 7,52,120 stating that no expenditure was incurred on the said record. The Assessing Officer did not accept the assessee's version and applied section 14A of the Act, 1961 read with rule 8D(2)(iii) of the Rules, 1962, disallowed the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfied 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 year beginning on or before the 1st day of April, 2001. (emphasis added) 11. Section 14A was inserted by the Finance Act, 2001, with effect from April 1, 1962. Proviso thereto was inserted by the Finance Act, 2002, with effect from May 11, 2001. 12. The fundamental principle underlying section 14A of the Act, 1961 is that income which is not taxable or exempt, falls in a separate stream, distinct from income taxable under the Act, 1961. That expenditure which is incurred in relation to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub-section (3) incorporates the mandate of sub-section (2) in the cases 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 the Act, 1961. 17. So far as proviso to sub-section (2) of section 14A of the Act, 1961 is concerned, it is not at all attracted to answer the questions under consideration in this appeal. 18. It is evident from the order of the Assessing Officer itself that the assessee produced books of account, bills and vouchers which were checked and tested. The manner in which the assessee disclosed its incomes from interest, etc. has been referred to in para 3 of the order passed by the Assessing Officer and it is not the case of the Assessing Officer that there was any discrepancy. 19. With regard to exemption, dividend income of ₹ 7,52,120, it is only para 4 of order of the Assessing Officer which reads as under : 4. The assessee has shown exempt dividend income of ₹ 7,52,120. The assessee was show caused regarding the applicability of section 14A. The assessee submitted that no expenditure has been incurred on this account. The contention of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the previous year ; B = the average of 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 ; C = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to 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. (3) For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. (emphasis added) 22. Rule 8D(1)(b) of Rules, 1962 will come into the picture only when the Assessing Officer recorded his non-satisfaction with regard to claim of the assessee that no expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and expenditure apportioned to exempt income or income not exigible to tax was not allowable as a deduction. 25. Section 14A of the Act, 1961 after its insertion came to be considered at length in CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC). It held that insertion of section 14A of the Act, 1961 with retrospective effect reflects serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of total income under the Act, 1961 against taxable income. 26. Sub-section (2) of section 14A of the Act, 1961 was considered by a Division Bench of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom). Therein even validity of section 14A of the Act, 1961 and rule 8D of the Rules, 1962 was challenged. The Constitutional validity was upheld. While summing up conclusion on the interpretation of the aforesaid provision, the court in para 55(viii) and (ix) of judgment observed as under (page 109 of 328 ITR) : (viii) Sub-section (2) of section 14A does not enable the Assessing Officer to apply the method prescribed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an off shoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot satisfied with the correctness of the claim of the assessee or the claim of the assessee that no expenditure has been incurred, he has to proceed in the manner indicated in rule 8D(2) of the Rules, 1962. The court then examined the order of the Assessing Officer passed in that case which contained various reasons and details of disclosure made by the assessee and found that there was compliance of requirement of section 14A(2) of the Act, 1961 and order shows application of mind on the part of the Assessing Officer to the accounts of the assessee from the assessment order itself. 30. Learned counsel for the Revenue when confronted with the aforesaid expositions of law could not place anything otherwise before this court so as to persuade us to take a different view. He, however, submitted that whatever has been omitted by the Assessing Officer, the same has been rectified by the Commissioner of Income-tax (Appeals) in the appellate order, when it has discussed everything in detail justifying as to why exemption of expenditure claimed by the assessee was rightly disallowed by the Assessing Officer. 31. In our view, jurisdiction to apply section 14A of the Act, 1961 contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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