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TMI Blog2020 (10) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... se. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank [ 2018 (6) TMI 1283 - KARNATAKA HIGH COURT] . Negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. Disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure u/s 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. Dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other High Courts like Karnataka, Delhi, Punjab and Haryana and Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax [(2018) 91 taxmann.com 154 (SC)] that 'the disallowance of expenditure incurred to earn exempted income under Section 14A of the Income Tax Act, cannot exceed such exempt income itself during the relevant assessment year' is still sought to be re-agitated in the present appeal filed by the Assessee because the Tribunal took a wrong view of the matter and the learned counsel for the Revenue still wanted us to give it a second thought. 4. We are not at all inclined to do this as such disallowance of expenditure purportedly incurred for earning the exempted income cannot exceed the actual exempt income in the hands of the assessee, is not only a concluded position in law, but no other possible view appeals to us at all. The exempted income in the present case is Dividends earned by Assessee on the investments made by it in the Equity Shares of other companies. 5. What seems to have caused this continuous problem is the CBDT Circular No.5/2014 dated 11.02.2014, referred to in paragraph 5 of the impugned order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal filed by the Assessee is as under: Whether the Tribunal was justified in confirming the disallowance of ₹ 98,16,104/- as expenditure incurred on earning the exempt income, in excess of ₹ 41,042/- earned during the Assessment Year 2009-10, where the assessee made investments mostly in subsidiary companies shares to gain control over the same, but not for the purpose of earning exempt income in the form of dividends of such shares? 8. We have heard Mr.R.Sivaraman, learned counsel appearing for the Assessee and Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for the Revenue. 9. A Co-ordinate Bench of this Court, in the case of CIT v. M/s. Tidel Park Limited [TCA Nos.732 733 of 2018 decided on 07.07.2020], has relied upon the decisions of the Delhi High Court in the case of Joint Investments Private Limited v. CIT [(2015) 372 ITR 694 (Del.)] and CIT v. Taikisha Engineering India Limited [ITA No.115 of 2014 decided on 25.11.2014] and Bombay High Court decision in the case of Godrej Boyce Manufacting Company Limtied v. DCIT [(2010) 328 ITR 81] and categorically held that the Assessing Officer was not justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was justified in disallowing the same. 8. We are not impressed with the said contention raised by the learned counsel for Revenue. The said disallowance, under Section 14A of the Act r/w Rule 8D of the Rules, of the expenditure incurred to earn an exempted income has to be computed in accordance with Rule 8D of the Rules, which in essence stipulates that the expenditure directly relatable to the earning of such exempted income, can only be disallowed under Section 14A of the Act. 9. The assessee in the present case had claimed that he had not incurred any expenditure for earning of the said dividend income on such statutory SLR investments made by it. The amount of investments itself cannot be considered as an expenditure for earning an exempted income viz., the dividends. The computation of disallowance under Section 14A of the Act has to be made as per Rule 8D of the Rules. 10. Therefore, on the basis of actual expenditure incurred by the assessee for earning such exempted income or an average estimated basis, on the basis of the total value of investments was required to be computed by the assessing authority. We do not find, any such computation on the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (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( 2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one percent of the annual average of the monthly averages of the opening and closing balances of the value of investment , income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee] (3) [deleted w.e.f. 02.06.2016]] R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Authority. 14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of ₹ 2,48,85,000/- as expenses to earn exempted Dividend income of ₹ 1,80,30,965/- is per se absurd and hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, where the assessee claimed that assessee did not incur any such expenditure during the year in question to earn Dividends of ₹ 1,80,30,965/-, the burden was upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to earn such exempted Dividend income. The disallowance under Section 14A cannot be a wild guesswork bereft of ground realities. It has to have a reasonable and close nexus with the factually incurred expenses. It is not dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company . In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove. 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w. Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year . 9. We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax Vs. Maharashtra Sugar Mills Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch beyond the quantum of exempted income of dividend earned by the Assessee in this year. The misconception of the Assessing Authority as well as Tribunal appear to have arisen because they have read Rule 8D providing for computation method of disallowance in isolation, as if it were an island provision or stand alone charging provision and they assumed that the disallowance as computed under Rule 8D is to be taxed as a notional income of the Assessee. This is absolutely impermissible in law. The reach of computation provision, namely Rule 8D cannot be read beyond the parent provision of Section 14A itself, which itself is not a charging provision, but a restriction on allowance of expenditure incurred to earn exempted income. The Assessing Authority has to mandatorily record his satisfaction with regard to the proportionate disallowance of expenditure under Section 14A of the Act as made by the Assessee that it is not satisfactory for such cogent reasons as specified and therefore, the same is liable to be rejected and therefore, the computation method under Rule 8D can be invoked as a legislative way out to compute the quantum of disallowance. Unfortunatley, the Revenue Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself. The Tribunal itself in many such cases has upheld the disallowance under Section 14A only to the extent of 2% of the Dividend income or other exempted income even if Assessee claimed that no expenditure was incurred to earn such Dividend income and even appeals filed by the Assessee against such 2% disallowance have been dismissed by this Court. Therefore, such an inconsistent approach on the part of the Tribunal cannot be sustained. 16. The contention raised on behalf of the Revenue by Mr.Karthik Ranganathan that even if the dividend income is not earned in the present year, since the investment is made for the strategic purposes to have control over the subsidiary companies, whenever in future a huge dividend can be declared, it will be earned by the Assessee and in that future year, the Assessee will not have incurred any expenditure to earn that income and therefore, a larger disallowance under Rule 8D should be allowed, is only an ingenuity of argument covered by the absurdity thereof. The disallowance of expenditure incurred for the year in question only can be considered under Section 14A of the Act and no such hypothetical earning in future as against no expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,00,000/- Investment in sister concerns ₹ 1,59,39,000/- 6.2. For the assessment year 2011-12, the total investment is as follows: Subsidiaries ₹ 5,17,41,16,895/- UTI Infrastructure Advantage Fund Series ₹ 8,53,000/- Investment in sister concerns ₹ 1,59,39,000/- 6.3. In this case, the assessee made average investment which yields no income or exempted income is as follows: 2009-10 ₹ 1,96,32,20,750/- 2010-11 ₹ 3,39,69,83,166/- 2011-12 ₹ 4,78,02,04,127/- The AO disallowed 0.5% of the average investment as follows: 2009-10 ₹ 98,16,104/- 2010-11 ₹ 1,69,84,915/- 2011-12 ₹ 2,39,01,020/- The assessee divident income received and claimed as exempt for these assessment years are as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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