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2023 (10) TMI 32

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..... to demonstrate that claim of the assessee was incorrect. In the present case, it is evident from the satisfaction recorded by the AO of the assesses claim of expenses relating to exempt income not being correct, that it is merely based on general observations with no reference to the accounts of the assessee. AO, we find, has expressed his dissatisfaction with the claim by giving general reasons stating that investment decisions were very complex in nature, they required substantial market research, day-to-day analysis of market trends and decisions etc. and also required huge investment in shares and consequential blocking of funds. He has not recorded any dissatisfaction having regard to the accounts of the assessee. The satisfaction of the AO, has to be an objective satisfaction, and it cannot be based on general statements made; statements which are not supported with any facts or figures. Therefore, we have no hesitation in holding, that the satisfaction recorded in the present case by the AO did not fulfill the requirements prescribed by the law u/s 14A(2) - Decided in favour of assessee.
Smt. Annapurna Gupta, Accountant Member And Shri T.R.Senthil Kumar, Judicial Member .....

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..... Court in the case of Maxopp Investment Ltd. CIT, (2018) 402 ITR 640 (SC) laying down the law that the satisfaction of the AO ,that the assessee's claim of expenses pertaining to exempt income is not correct, is a prerequisite for invoking Rule 8D of the Rules for computing the quantum of disallowance to be made under section 14A of the Act. The ld.DR did not dispute this proposition of law. 6. The dispute in the present case is only vis a vis existence of such satisfaction so as to justify invoking Rule 8D of the Rules for computing disallowance of expenses u/s 14A of the Act. In this regard our attention was drawn to the explanation offered by the assessee regarding its claim of expenditure pertaining to earning of exempt income, which is reproduced at page no.2 to 4 of the assessment order as under: Applicability of Section 14A. "Without Prejudice It is pertinent to note that ours is a cash rich company and having sufficient surplus fund as part of reverses and surplus. It is also pertinent to note that net profit before tax for the year under consideration is Rs. 10,18,89,208/- which works out to be 67.61 0% of turnover Rs. 15,07,06,227/-). Further please also note .....

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..... xcept voluntarily disallowed. Under section, 14A Sub-Section (2) provides the procedure for determining the amount of expenditure incurred by the assessee in relation to such income which does not form part of the total income if the A.O. is not satisfied with the correctness of claim of assessee in respect of such expenditure. Sub-Section (3) further provides that the provisions of Sub-Section (2) shall apply in relation to a case where an assesses claims that the expenditure incurred by the assessee and A.O. is not satisfied with the contention of the assessee. Further, the procedure for determining the amount of expenditure incurred in relation to the exempt income is to be worked out in accordance with Rule 8D. On going through the above, it is clearly noticed that the purpose of these two Sub-Sections is to determine the amount of expenditure incurred in relation to exempt income. These only lay down the procedure and mechanism for working out the expenditure in relation to income which is exempt from tax. Rule 8D has been enshrined to the Income Tax Rules, 1962 which prescribes the method by which the A. O. has to determine the disallowance of expenditure as relatable to ex .....

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..... regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investments in shares and consequential blocking of funds. (ii) It is well known that capital has cost and that element of cost is represented by interest. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. (iii) Had this money been not invested into various instrument from which assessee will have /had exempt income then it would have been available to the assessee for its business purposes and to that extent it may not have been necessary to borrow from the banks. And it is not out place to mention that as assessee claims that it had surplus funds then why need of borrowing arose for business purpose as claimed by assessee itself. Moreover, it cannot be said that because, in the concerned assessment year investment came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee. Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. The .....

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..... incurred to earn exempt income. (viii) Section 14A makes a distinction between exempt income and taxable income. It treats both of them as separate classes for computation of income after allocation of expenditure relating thereto and mandates that no deduction in respect of any expenditure shall be allowed against taxable income which is incurred in relation to exempt income. The underlying object is to compute both the exempt income and taxable income correctly, which is possible only after the expenditure incurred in relating thereto is allocated to them. In other words, section 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable income, as this would have the effect of artificially inflating the exempt income and thereby deflating the taxable income. (ix) The term expenditure occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The Phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is th .....

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..... out that this fund is not in immediate need, then also it does not mean that this fund was not needed for whole financial year. And it is not out of the place to mention that assessee has incurred borrowing cost of.... Thus such logic falls flat on its face. In such a situation alternatively not to prejudice to above arguments it can be seen that the interest expenditure incurred on borrowed funds cannot be allowed as business expenditure u/s 36(1 )(iii)of the act. For the reasons stated above the assessing officer is satisfied that the provisions u/s 14A and Rule 8D are attracted in this case." 8. The argument of the ld.counsel for the assessee was that it had been clearly pointed out to the AO that all expenses pertaining to the investment made by the assessee, which had earned or were capable of earning exempt income by way of dividend, had been disallowed by the assessee, be that in relation to management fees to PMS, DEMAT charges etc. so much so, even 5% of the Managing Director's remuneration, who was taking managerial decision; the expenditure incurred on telephone which was used for investment purpose and entire salary of accountant was disallowed by the assessee under .....

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..... Court, which were placed before us in the Index running from 'A' to 'J', more particularly, our attention was drawn to the decision of Hon'ble Gujarat High Court in the case of Pr.CIT Vs. Gujarat State Fertilizers & Chemicals Ld., wherein he pointed out that the Hon'ble Gujarat High Court had categorically stated that having regard to section 14A of the Act before invoking Rule 8D, the AO is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctnessof the claim of the assessee in respect of such expenditure, in relation to the income which does not form part of the total income. He drew our attention to para 18 of the said order, which reads as under: "The language of section 14A of the Act is plain and clear. Before invoking rule 8D, the Assessing Officer is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. To put it in other words, the condition precedent of recording the requisite satisfaction which is a safeguard pro .....

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..... y the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied 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. …. ….. …. …. 14. In the present case, it is evident from the satisfaction recorded by the AO of the assesses claim of expenses relating to exempt income not being correct, that it is merely based on general observations with no reference to the accounts of the assessee. The assessee had claimed such expenses to amount to Rs. 6,56,966/- and had given details of nature of such expenses also. The AO, we find, has expressed his dissatisfaction with the claim by giving general reasons stating that investment decisions were very complex in nature, they required substantial market research, day-to- .....

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