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TMI Blog2013 (5) TMI 996X X X X Extracts X X X X X X X X Extracts X X X X ..... application of the provisions of section 14A of the Act. 2. The assessee is a company engaged in the business of printing currency notes for Reserve Bank of India. In the course of assessment proceedings, the AO noticed that the assessee has invested a sum of ₹ 20.00 Crores in units of mutual funds. According to the AO, the dividend income or capital gain on sale of the units which the assessee is likely to earn by reason of aforesaid investment would not form part of the total income under the Act. In view of the provisions of Sec. 14A of the Act, which lays down that any expenditure incurred in earning income which does not form part of the total income under the Act shall not be allowed as deduction, the AO was of the view that the interest expenses that were incurred on the funds borrowed which were utilized to make investments in units of mutual funds and other general and administrative expenses, should be proportionately disallowed. The AO accordingly, called upon the assessee to show cause as to why such disallowance u/s. 14A of the Act should not be made. In reply, the assessee claimed that it has not received any income during the previous year and therefore, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to receipt of ₹ 43.22 Crores (3) Covering letter for receipt of ₹ 43.22 Crore The appellant was not able to furnish the above documents as it took some time to locate the individual documents from the voluminous vouchers. The appellant wishes to submit that none of the lower authorities questioned the factual statement made by the appellant. Hence, the appellant though it was not necessary to file these documents. The appellant has now been advised that it is advisable to file the above documents as additional evidences. These documents have a vital bearing on the case. Therefore, it is humbly prayed that the Hon'ble Tribunal be pleased to admit the above documents as additional evidences." 11. The learned DR however, opposed the application for admitting the additional evidence. According to the learned DR, under Rule 29 of the ITAT Rules, 1963, the assessee is not entitled to produce additional evidence on his own and it is only when the Tribunal requires additional evidence to be produced to enable it to pass orders or for any other substantial cause can additional evidence be admitted for consideration. According to the learned DR no such circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea that it had sufficient interest free funds which were enough to make the investments in question could not be rejected by the AO with certainty. This is made clear by the AO in para 3.4 of his order. 21. The AO has applied the provisions of Rule 8D(2)(ii) of the Rules and therefore the disallowance u/s. 14A of the Act has to be confined only to the interest expenditure debited in the profit and loss account. The claim of the Assessee before the AO was that no interest expenditure was incurred for making investments in units of mutual funds. The funds for making investment in units of mutual funds have its origin in the cash credit/overdraft Account of the Assessee. The Bank statement for the period ending 31.3.2008 shows that the outflow from the bank account for the investment in question was on 31.3.2008. Therefore during the previous year till the last day of the previous year all the funds had been used by the Assessee for the purpose of business and not used for making investment which can yield tax free income. The above being the factual position it cannot be said that the AO arrived at a satisfaction that the assessee has incurred expenditure by way of interest durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preferable to refer the matter to the AO for consideration. Reference was also made to the decision of the ITAT Mumbai Bench in the case of Jindal Drugs Ltd. v. Dy. CIT [IT Appeal No. 751 (M) of 2008, dated 15-2-2013], wherein the Mumbai Bench of the Tribunal took the view that considering the magnitude of the additional evidence filed by the assessee before the Tribunal and in fairness to both the parties, the issue should generally be set aside and remanded to the AO for fresh examination. 8. We have considered the submissions of the ld. DR and the contents of the miscellaneous petition. It is seen from para 5(iii) of the order of the CIT(A) that the assessee had contended before the CIT(A) that the investment in mutual funds was made by issue of a cheque dated 27.03.2008. The said cheque was presented only on 31.03.2008 and the funds went out of the assessee's bank account on 31.03.2008. This is clear from the bank statement which was filed as additional evidence before the Tribunal. The Revenue did not dispute the fact that the investment in mutual funds which would yield tax-free income was made on 27.03.2008. The additional evidence in the form of a bank statement, in ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act which was given as Annexure-I to the order of the Tribunal, is given below: 10. It can be seen from the aforesaid order that there are two disallowances, viz,, "(a) a sum of ₹ 7,10,315 made under Rule 8D(2)(ii) of the Rules, which is the disallowance of interest expenses. This has already been deleted by the Tribunal and is not the subject matter of this miscellaneous petition; (b) another disallowance made was of ₹ 6,15,000 which is the disallowance made under Rule 8D(2)(iii) of the Rules. This disallowance relates to disallowance of indirect expense as contemplated under the aforesaid Rules. For the sake of ready reference, we give below Rule 8D: "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 (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lts, if those provisions are applied blindly. In this regard, it was pointed out that if the value of investments are high and the expenses debited in the profit & loss account are less, then a situation will arise where disallowance by invoking Rule 8D(2)(iii) of the Rules will be much more than the expenses debited in the profit & loss account. The ld. counsel therefore submitted that it is necessary that Rule 8D(2)(iii) should not be applied blindly and the AO should take into consideration all facts to arrive at a just conclusion. (c) It was submitted that the amount disallowed cannot be for the whole year, but should be for a part of the days the investments were made." 14. The ld. DR submitted that the assessee did not produce evidence before the AO to substantiate its claim that no indirect expenses whatsoever were required to earn the exempt income. In this regard, the ld. DR pointed out to page 5 of the Assessing Officer's order, wherein the AO has arrived at a satisfaction that the claim of the assessee that no expenses were incurred to earn the tax-free income is not correct. It was also submitted that the assessee cannot deny that some of the indirect expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of ss. 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure....' 15. In the rejoinder, the ld. counsel for the assessee submitted that in para 34 at page 5 of the order, the AO has merely stated that it cannot be denied that no indirect expenses would have been incurred by the assessee in making the investments, without giving any basis on which such a finding was arrived at. Besides the above, the ld. counsel for the assessee also drew our attention to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 besides Bombay High Court decisions in the case of CIT v. Reliance Industries Ltd. [2011] 339 ITR 632/[2010] 8 taxmann.com 218 and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) and the decision of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT [2011] 203 Taxman 364/15 taxmann.com 390. He also referred to the following observations by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the computation mode as specified in Rule 8D(2) of the Rules. 17. In the present case, the assessee, in so far it relates to common expenses [falling within the ambit of Rule 8D(2)(iii) of the Rules], has taken a stand that no expenses whatsoever was incurred by the assessee. The AO in para 3.4 of his order has only dealt with the expenditure in the form of interest. With regard to other indirect common expenses, he has only made an observation that the assessee does not maintain separate accounts to enable identification of expenditure relating to exempt income. It is thus clear that as far as indirect expenses are concerned, neither the assessee has given any basis for his claim that no expenses were incurred for earning the exempt income, nor has the AO arrived at an objective satisfaction regarding the claim of the assessee that no indirect expenses were incurred to earn the tax-free income is not correct. In the circumstances, we are of the view that it would be just and appropriate that the order of the CIT(A) should be set aside and the issue with regard to disallowance to be made of indirect expenses under Rule 8D(2)(iii) of the Rules should be remanded to the AO for fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) Ltd. (supra) is a case where the Hon'ble Supreme Court held that section 14A and the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. The plea of the assessee that applying the Rule 8D blindly by the AO will lead to absurd results, in our view, is without any basis because while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. 19. With regard to decisions relied upon by either of the parties before us viz., the decision in the case of Hero Cycles Ltd. (supra), Walfort Share & Stock Brokers (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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