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TMI Blog2012 (11) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... 98 as under : Demat charges 5,44,431 STT 25,01,067 PMS charges 3,20,898 Other 1,97,102 35,63,498 3. The AO, in the assessment order took into account DMAT charges and STT paid and added the same to ₹ 33,49,068 (computed 8D disallowance as per prescribed formula), and came to the conclusive figure of ₹ 28,31,068. He, in fact, disregarded the disallowance made by the assessee suo moto. 4. Not satisfied by the decision of the AO, the assessee approached the CIT(A), who, sustained the computation, as made by the AO. 5. Aggrieved, the assessee is now before the ITAT. 6. Before us, the AR pointed out the disallowance made by the revenue authorities and reiterated his arguments before the revenue authorities. The AO pointed out that the revenue authorities, though applied the prescribed formula under Rule 8D, and also referred to the application of ratio decided by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd., reported in 328 ITR 81, but in fact, the revenue authorities have not adopted the spirit of the decision, but has applied the decision in a mechanical manner. 7. The AR also submitted that the revenue authorities did not specify as to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed". We have the benefit of the decision of Godrej & Boyce Mfg. Co. Ltd., the Hon'ble Bombay High Court held, reported in 328 ITR 81, wherein the Hon'ble Bombay High Court explained the intent for bringing in the provision of section 14A and its application. The Hon'ble Bombay High Court observes, "The insertion of section 14A was curative and declaratory of the intent of Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. However, assessees had claimed deductions in respect of income which was exempt under various provisions of the Act as a result of which the tax incentive given in respect of certain categories of income which were exempt was being utilized to reduce the tax payable on non-exempt income. This being contrary to legislative intent, section 14A was inserted in order to restore the legal position consistent with Parliamentary intent. Declaratory or curative amendments are construed to be retrospective because they authoritatively set forth the original legislative intent. Parliament ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular No. 14 of 2001, dated November 22, 2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heads. As a result of section 14A, the permissible deductions can be allowed only with reference to income which is brought under one of those heads and is chargeable to tax. If an income does not form part of the total income, then the related expenditure is liable to be disallowed. The test which has been enunciated in Walfort for attracting the provisions of section 14A is that "there has to be a proximate cause for disallowance which is its relationship with the tax exempt income". Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A. The following principles would emerge from section 14A and the decision in Walfort : (a) The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed ; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The method, having regard to the meaning of the expression "prescribed" in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having ..... X X X X Extracts X X X X X X X X Extracts X X X X
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