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TMI Blog2022 (1) TMI 140X X X X Extracts X X X X X X X X Extracts X X X X ..... se. 3. The learned Commissioner of Income-tax (Appeals) failed to appreciate that the provisions of section 14A of the Act are not automatic and the learned Assessing Officer is not justified in summarily resorting to application of Rule 8D of the Rules. 4. The learned Commissioner of Income-tax (Appeals) failed to appreciate the ground of the appellant that the learned Assessing Officer having failed to conduct an examination of the books of -account and derive satisfaction in negative on the claim of the Appellant that no expenditure has been incurred towards earning any exempt income. disallowance made is not sustainable in law. 5. The learned Commissioner of Income-tax (Appeals) failed to appreciate that since the Appellant used its own funds for the purpose of making the investment, the question of disallowance of any by invoking section 14A of the Act does not arise. 6. The learned Commissioner of Income-tax (Appeals) failed to appreciate that since no expenditure has in fact been incurred by the Appellant during the impugned period, disallowance made under section 14A r.w.r 8D is a hypothetical one and consequently erroneous and not sustainable in law. 7. The appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ously invoked the rigors of Rule 8D, despite having not found anything in the accounts of the assessee to suggest that expenditure was indeed incurred by the assessee. 6. Reliance is placed on the following decisions:- * Relaxo Footwears Ltd. v. ACIT reported in 50 SOT 102 (Delhi); * Priya Exhibitors (P) Ltd. v. ACIT reported in 54 SOT 356 (Delhi); * DCIT vs. Ashish Jhunjhunwala- ITA No.1890/Ko1/2012 (Kolkata Bench ITAT); * Kalyani Steels Ltd. v. Addl.CIT - ITA No.1733/PN/2012 (Pune Bench-B, ITAT); * REI Agro Ltd., v. DCIT reported in 160 TTJ 107 (Kolkata); * ACIT v. Magarpatta Township Development & Construction Co.Ltd. - [20141 46 taxrnann.com 284 (Pune) 7. The Hon'ble Punjab and Haryana High court in the case of CIT v. Hero Cycles Limited reported in 323 ITR 518 (P&H) has held that disallowance under section 14A requires finding of incurring of expenditure and where it is found that no expenditure has been incurred, disallowance under section 14A cannot stand and in CIT v. Deepak Mittal reported in 361 ITR 131 has held that the Assessing Officer cannot blindly resort to Rule 8D of the Rules and that where the Assessee claims that no expenditure is incurred, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of CIT v. Sociedade De Fomento Industrial (P.) Ltd., 429 ITR 207 (Bom) wherein it was held that where assessee invested certain own funds in exempted categories such as mutual funds and earned income and, had not incurred any expenditure in earning said income, assessee would be entitled to exemption under section 14A, read with rule 8D. In Maxopp Investment Ltd. v. CIT, 402 ITR 640 (SC) it was held as under:- "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 satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO." 12. According to the ld. AR, only the actual expenses incurred to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll 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. 15. The stand of the assessee is that the disallowance under Rule 8D(2)(iii) shall be equal only to the actual expenditure incurred and in this regard the AO cannot apply the above formula automatically. However, in our opinion, as is evident from a reading of the Rule 8D(2)(iii) of the I.T. Rules, the AO has to apply the formula prescribed under the said Rule for the purpose of computation of expenditure incurred in earning of exempt income and the authorities have no discretionary power to tinker that formula so as to meet the needs of the assessee. We do not find any merit in the arguments of the ld. AR. 16. One more argument of the ld. AR is that the AO failed to conduct examination of books of account and derive satisfaction in the negative on the claim of the assessee that no expenditure h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finition of variable 'A' in the formula as per Rule 8D(2)(ii) and rightly so, because it is only then that common interest expenses which are to be allocated as indirectly relatable to taxable income and tax exempt income can be computed. This is clear from the following observations :- "60. In the affidavit in reply that has been filed on behalf of the revenue an Explanation has been provided of the rationale underlying rule 8D. In the written submissions which have been filed by the Additional Solicitor General it has been stated, with reference to rule 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.) ........ The justification that has been offered in support of the rationale for rule 8D cannot be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment." 21. Thus, interest expenses directly attributable to tax exempt income is also directly attributable to taxable income are required to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii). 22. Further, in the present case, wherein the assessee does not offer any disallowance under Rule 8D(2)(ii) in respect of exempt income, then the provisions of section 14A(2) r.w. Rule 8D(2) can be invoked u/s. 14A(3) of the Act by the AO and there is no necessity of recording further satisfaction by the AO. In other words, when the assessee itself fails to make disallowance suo motu u/s. 14A r.w. Rule 8D, then the AO is at liberty to invoke these provisions. We find no inf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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