$~20 & 21
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: 25th November, 2014
+ ITA 115/2014 & 119/2014
COMMISSIONER OF INCOME TAX-VI
..... Appellant
Through Ms. Suruchi Aggarwal, Sr. Standing
Counsel
versus
TAIKISHA ENGINEERING INDIA LTD
..... Respondent
Through Mr. K.R.Manjani, Advocate
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (Oral)
These two appeals by the Revenue under Section 260A of the Income
Tax Act, 1961 (Act` for short) relate to assessment years 2008 -09 and
2009-10.
2. The issue raised by the Revenue in these appeals pertains to Section
14A of the Act and Rule 8D of the Income Tax Rules, 1962 (Rules` for
short) and disallowance of expenditure relating to exempt income.
3. For the assessment year 2008-09, the respondent assessee had filed
ITA 115/2014 & 119/2014 Page 1 of 20
return declaring total taxable income of Rs.31,14,68,297/- and exempt
income of Rs.2,46,81,747/-. The assessee had voluntarily disallowed
expenditure of Rs.1,15,000/- under Section 14A of the Act, calculation for
which were submitted before the Assessing Officer by way of letter dated
2nd November, 2010. The Assessing Officer considered the reply and noted
that the voluntary disallowance did not fulfil the requirements of Section
14A of the Act read with Rule 8D of the Rules. No other reason was
indicated. Decision of the Bombay High Court in Godrej & Boyce Mfg. Co.
Ltd. vs. CIT [2010] 328 ITR 81 (Bom.) and the principles enunciated and
enumerated in the said decision were quoted. The Assessing Officer
recomputed the disallowance by applying Rule 8D of the Rules and
quantified the disallowance at Rs.42,59,540. As the assessee had himself
disallowed an amount of Rs.1,15,000/-, the balance amount of
Rs.41,44,540/- was added and the returned income enhanced.
4. For the assessment year 2009-10, the assessee had filed return
declaring income of Rs.8,98,19,429/- and had voluntarily disallowed
Rs.2,76,194/- under Section 14A of the Act. The Assessing Officer noticed
that the assessee had earned exempt dividend income to the tune of
Rs.17,43,782/- and had declared long term capital gain, which was not
ITA 115/2014 & 119/2014 Page 2 of 20
taxable. The Assessing Officer recorded that he had considered the reply to
justify the disallowance of Rs.2,76,194/-, but without any further elucidation
held that the disallowance did not fulfil the requirements of Section 14A of
the Act read with Rule 8D of the Rules. Disallowance by applying Rule 8D
of the Rules was computed at Rs.5,36,393/-. As the assessee had disallowed
Rs.2,76,194/- in the computation of income, the difference of Rs.2,60,199/-
was added and the returned income enhanced.
5. Appeals were disposed of by the common order dated 26th March,
2012 by the Commissioner of Income Tax (Appeals) (CIT(A)`, for short),
who deleted the addition after referring to the following part of the written
submissions filed by the assessee in relation to the assessment year 2008-09:
"Investment in Mutual Fund is made from current account
in HDFC bank in which no interest is incurred. Investments
were made out of surplus funds. Assessee deposited funds
amounting to Rs. 28,7130,569.00 generated on sale of
mutual fund during the F.Y. 2007-08 and funds amounting
to Rs. 15,59,58,985.00 were used for acquiring the
investment Which results into net surplus of Rs.
13,11,71,584.00. In support of this we have already filed the
details of funds realised on sale of mutual funds and
deposited along with the details funds utilized for
investment in current of HDFC bank. Also copy of the bank
statement showing these transactions is already filed.
"Assessee having interest free funds far in excess of amount
invested in mutual funds, no disallowance could be made
under section 14A because the interest expenditure was
incurred in respect of the borrowing in cash credit limits
ITA 115/2014 & 119/2014 Page 3 of 20
utilized for normal business purposes of the assessee and no
part of the borrowed funds has been utilized by the assessee
for making investment in the mutual funds. Rather on
account of capital gain on sale of mutual funds, company
generated surplus funds."
6. He observed that the assessee had share capital of Rs.60,00,000/- and
Reserve & Surplus funds of Rs.53.19 crores as on 31 st March, 2008 and
share capital of Rs.60,00,000/- and Reserve and Surplus funds of Rs.41.49
crores as on 31st March, 2007. Therefore, no interest bearing funds had been
used for making investments, which had yielded tax free income like
dividends.
7. In respect of assessment year 2009-10, similar findings were recorded
by the CIT(A), who observed that direct expenditure incurred by the
respondent assessee was Rs.643.26 as DEMAT charges and in respect of
interest income, he referred to the following explanation of the assessee:-
Interest Clause (ii)
Investment in Mutual Fund is made from current account
in HDFC bank in which no interest is incurred. Investments
were made out of surplus/own funds deposit earlier.
Assessee deposited funds in HDFC current account
amounting to Rs. 10,6715,425.00 generated on sale of
mutual fund during the period October 07, March 2008 and
Apr. 2008. Dividend amounting to Rs.57,90,120.00
received during the F.Y. 2007-08 also invested. Total
surplus/own funds available are Rs. 112505545.00 utilised
by assessee for making investment in the A.Y. 2009-10.
Details are enclosed "Exhibit-3".
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Photocopy of the bank statement for the Exhibit no. 3 for
the period 01.10.2007 to 08.04.2008 is enclosed showing
funds deposited marked vide "Exhibit-4".
Photocopy of the bank statement for the Exhibit no. 2 for
the F.Y. 2008-09 is enclosed showing investment made
marked vide "Exhibit-5".
As explained above no interest bearing funds were used by
the assessee for investment. Interest bearing funds were
used by the assessee for doing normal business of the
company. Assessee used surplus/own funds for the
investment in mutual funds.
As the assessee have interest free funds far in excess of
amount invested in mutual funds. Therefore, no
disallowance could be made under clause (ii) of section 14A
because of the interest expenditure was incurred directly
attributable to the business purpose. No part of the
borrowed funds has been utilized by the assessee for making
investment in mutual funds."
14.2 The AR relied on the following case laws:
· Sushma Kapoor 319 ITR 299 (Del.)
· DCIT vs. Maruti udyog Ltd. 92 ITJ 987 (Del.)
· Voltas Ltd. 125 ITJ 601 (Mum.) (Trb.)
· Dishman Pharmaceuticals Ltd. vs. DCIT 45 SOT 37 (Ahd)
(URO)
15. I have gone through the assessment order and the
detailed written submissions.
The AO worked out disallowance of Rs. 5,36,393/- under
Rule 8D(2)(ii). The AR has explained that no borrowed
funds were utilized for making the investment. The issue
has been examined in the earlier years and found that no
disallowance is called for under Rule 8D(2)(ii).
It is further seen that the disallowance under rule 8D(2)(iii)
worked out to Rs. 2,76,194/- which was forgotten to be
added by mistake. The AR has no objection for disallowing
of Rs. 2,76,914/- which he has accepted in the assessment
proceedings.
Relief: 5,36,393/-
Confirmed: 2,76,914/-
ITA 115/2014 & 119/2014 Page 5 of 20
Accordingly Ground No.1 is partly allowed.
8. The Income Tax Appellate Tribunal (Tribunal`, for short) by a
common order dated 27th September, 2013 has dismissed the appeals filed
by the Revenue. Rule 8D of the Rules it was held was applicable and the
issue related to computation under sub Rule (2) and the three sub-clauses.
Reference was made to clause (ii) of sub Rule (2) to Rule 8D of the Rules
and it has been held:-
2.4. ... Only clause (ii) is involved in the present appeal.
The AO considered the total interest paid by the assessee for
allocating a sum of [Rs.] 36.76 lakh to the investments
yielding exempt income. At the threshold it needs to be
determined as to whether any interest expenditure can be
attributed to the securities on which such exempt income
was earned. The question of disallowance of such interest
u/s 14A would arise only if some expenditure is said to have
been incurred in relation to investment in such securities. In
this regard, it is observed that the assessee made total
investment of [Rs.] 6.33 crore in shares or securities
resulting into exempt income. As against that share holder
funds stood at [Rs.] 53.79 crore at the end of the year. Thus,
it is evident that the amount invested in such shares or
securities is far in excess of share holders' funds.
9. Reference was made to the decision of the Delhi High Court in CIT
vs. Tin Box Co. [2003] 260 ITR 637 (Del) to hold that when the assessee
had sufficient funds and non interest funds were advanced to a sister
concern, no disallowance was justified. Further, the Bombay High Court in
CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.) had
ITA 115/2014 & 119/2014 Page 6 of 20
similarly held that when sufficient non interest funds were available for
investment then no disallowance of interest should be made. The Bombay
High Court had placed reliance on the decision of East India
Pharmaceutical Works Ltd. vs. CIT [1997] 224 ITR 624 (SC) to the effect
that if the assessee had sufficient non interest funds, then investment made
in shares and securities resulting in exempt income should not lead to
disallowance of interest expenditure, as there was no question of attributing
any interest to such investments. Lastly, reference was made to the decision
of the Gujarat High Court in CIT vs. Suzlon Energy Ltd. [2013] 354 ITR
630, to the same effect.
10. Having heard the Counsel for the parties, we feel that the respondent
assessee is entitled to succeed on somewhat different grounds and reasons,
than those elucidated by the Tribunal.
11. Section 14A of the Act is relevant and reproduced below:-
14A. (1) For the purposes of computing the total income
under this Chapter, no deduction shall be allowed in respect
of expenditure incurred by 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
ITA 115/2014 & 119/2014 Page 7 of 20
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.
(3) The provisions of sub-section (2) shall also apply in
relation to a case where an assessee claims that no
expenditure has been incurred by him in relation to income
which does not form part of the total income under this Act.
Provided that nothing contained in this section shall
empower the Assessing Officer either to reassess under
section 147 or pass an order enhancing the assessment or
reducing a refund already made or otherwise increasing the
liability of the assessee under section 154, for any
assessment year beginning on or before the 1st day of April,
2001.
Section 14A of the Act postulates and states that no deduction shall be
allowed in respect of expenditure incurred by an assessee in relation to
income which does not form part of the total income under the Act. Under
sub Section (2) to Section 14A of the Act, the Assessing Officer is required
to examine the accounts of the assessee and only when he is not satisfied
with the correctness of the claim of the assessee in respect of expenditure in
relation to exempt income, the Assessing Officer can determine the amount
of expenditure which should be disallowed in accordance with such method
as prescribed, i.e. Rule 8D of the Rules (quoted and elucidated below).
Therefore, the Assessing Officer at the first instance must examine the
disallowance made by the assessee or the claim of the assessee that no
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expenditure was incurred to earn the exempt income. If and only if the
Assessing Officer is not satisfied on this count after making reference to the
accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of
the Rules. Thus, Rule 8D is not attracted and applicable to all assessee who
have exempt income and it is not compulsory and necessary that an assessee
must voluntarily compute disallowance as per Rule 8D of the Rules. Where
the disallowance or nil` disallowance made by the assessee is found to be
unsatisfactory on examination of accounts, the assessing officer is entitled
and authorised to compute the deduction under Rule 8D of the Rules. This
pre-condition and stipulation as noticed below is also mandated in sub Rule
(1) to Rule 8D of the Rules.
12. Rule 8D of the Rules, again for the sake of convenience, is
reproduced below:-
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
ITA 115/2014 & 119/2014 Page 9 of 20
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;
(ii) in a case where the assessee has incurred
expenditure by way of interest during the previous
year which is not directly attributable to any
particular income or receipt, an amount computed in
accordance with the following formula, namely :--
A × B/C
Where A = amount of expenditure by way of
interest other than the amount of interest included in
clause (i) incurred during the previous year ;
B = the average of value of
investment, income from which does not or shall 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 ;
C = the average of total assets as
appearing in the balance sheet of the assessee, on the
first day and the last day of the previous year ;
(iii) an amount equal to one-half per cent of
the average of the value of investment, income from
which does not or shall 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.
Sub Rule (1) categorically and significantly states that the Assessing Officer
having regard to the account of the assessee and on not being satisfied with
the correctness of the claim of expenditure made by the assessee or claim
ITA 115/2014 & 119/2014 Page 10 of 20
that no expenditure was incurred in relation to income which does not form
part of the total income under the Act, can go on to determine the
disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will
not come into operation until and unless the specific pre-condition in sub
Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in
unison and affirmatively record that the computation or disallowance made
by the assessee or claim that no expenditure was incurred to earn exempt
income must be examined with reference to the accounts, and only and when
the explanation/claim of the assessee is not satisfactory, computation under
sub Rule (2) to Rule 8D of the Rules is to be made.
13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules
until and unless the Assessing Officer has first recorded the satisfaction,
which is mandated by sub Section (2) to Section 14A of the Act and sub
Rule (1) to Rule 8D of the Rules.
14. The view and legal ratio expressed above is not being elucidated for
the first time. The Delhi High Court in Maxopp Investment Ltd. vs.
Commissioner of Income Tax [2012] 347 ITR 272, has observed:-
Scope of sub-sections (2) and (3) of Section 14A
Sub-section (2) of Section 14 A of the said Act provides the
manner in which the Assessing Officer is to determine the
amount of expenditure incurred in relation to income which
ITA 115/2014 & 119/2014 Page 11 of 20
does not form part of the total income. However, if we
examine the provision carefully, we would find that the
Assessing Officer is required to determine the amount of
such expenditure only 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 the said Act. In other words,
the requirement of the Assessing Officer embarking upon a
determination of the amount of expenditure incurred in
relation to exempt income would be triggered only if the
Assessing Officer returns a finding that he is not satisfied
with the correctness of the claim of the assessee in respect
of such expenditure. Therefore, the condition precedent for
the Assessing Officer entering upon a determination of the
amount of the expenditure incurred in relation to exempt
income is that the Assessing Officer must record that he is
not satisfied with the correctness of the claim of the
assessee in respect of such expenditure. Sub-section (3) is
nothing but an offshoot of sub-section (2) of Section 14A.
Sub-section (3) applies to cases where the assessee claims
that no expenditure has been incurred in relation to income
which does not form part of the total income under the said
Act. In other words, sub-section (2) deals with cases where
the assessee specifies a positive amount of expenditure in
relation to income which does not form part of the total
income under the said Act and sub-section (3) applies to
cases where the assessee asserts that no expenditure had
been incurred in relation to exempt income. In both cases,
the Assessing Officer, if satisfied with the correctness of the
claim of the assessee in respect of such expenditure or no
expenditure, as the case may be, cannot embark upon a
determination of the amount of expenditure in accordance
with any prescribed method, as mentioned in sub-section (2)
of Section 14A of the said Act. It is only if the Assessing
Officer is not satisfied with the correctness of the claim of
the assessee, in both cases, that the Assessing Officer gets
jurisdiction to determine the amount of expenditure incurred
ITA 115/2014 & 119/2014 Page 12 of 20
in relation to such income which does not form part of the
total income under the said Act in accordance with the
prescribed method. The prescribed method being the
method stipulated in Rule 8D of the said Rules. While
rejecting the claim of the assessee with regard to the
expenditure or no expenditure, as the case may be, in
relation to exempt income, the Assessing Officer would
have to indicate cogent reasons for the same.
Rule 8D
As we have already noticed, sub-section (2) of Section 14A
of the said Act refers to the method of determination of the
amount of expenditure incurred in relation to exempt
income. The expression used is such method as may be
prescribed. We have already mentioned above that by
virtue of Notification No.45 of 2008, dated March 24, 2008,
the Central Board of Direct Taxes introduced Rule 8D in the
said Rules. The said Rule 8D also makes it clear that 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 asses
see; 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 said Act for
such previous year, the Assessing Officer shall determine
the amount of the expenditure in relation to such income in
accordance with the provisions of sub-rule (2) of Rule 8D.
We may observe that Rule 8D(1) places the provisions of
Section 14A(2) and (3) in the correct perspective. As we
have already seen, while discussing the provisions of Sub-
sections (2) and (3) of Section 14A, the condition precedent
for the Assessing Officer to himself determine the amount
of expenditure is that he must record his dissatisfaction with
the correctness of the claim of expenditure made by the
assessee or with the correctness of the claim made by the
assessee that no expenditure has been incurred. It is only
when this condition precedent is satisfied that the Assessing
Officer is required to determine the amount of expenditure
ITA 115/2014 & 119/2014 Page 13 of 20
in relation to income not includable in total income in the
manner indicated in sub-rule (2) of Rule 8D of the said
Rules.
It is, therefore, clear that determination of the amount of
expenditure in relation to exempt income under Rule 8D
would only come into play when the Assessing Officer
rejects the claim of the assessee in this regard. If one
examines sub-rule (2) of Rule 8D, we find that the method
for determining the expenditure in relation to exempt
income has three components. The first component being
the amount of expenditure directly relating to income which
does not form part of the total income. The second
component being computed on the basis of the formula
given therein in a case where the assessee incurs
expenditure by way of interest which is not directly
attributable to any particular income or receipt. The formula
essentially apportions the amount of expenditure by way of
interest (other than the amount of interest included in clause
(i)) incurred during the previous year in the ratio of the
average value of investment, income from which does not
or shall not form part of the total income, to the average of
the total assets of the assessee. The third component is an
artificial figure one half percent of the average value of
the investment, income from which does not or shall not
form part of the total income, as appearing in the balance
sheets of the assessee, on the first day and the last day of the
previous year. It is the aggregate of these three components
which would constitute the expenditure in relation to
exempt income and it is this amount of expenditure which
would be disallowed under Section 14A of the said Act. It
is, therefore, clear that in terms of the said Rule, the amount
of expenditure in relation to exempt income has two aspects
(a) direct and (b) indirect. The direct expenditure is
straightaway taken into account by virtue of clause (i) of
sub-rule (2) of Rule 8D. The indirect expenditure, where it
is by way of interest, is computed through the principle of
apportionment, as indicated above. And, in cases where the
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indirect expenditure is not by way of interest, a rule of
thumb figure of one half percent of the average value of the
investment, income from which does not or shall not form
part of the total income, is taken.
15. Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co.
Ltd. versus Deputy Commissioner of Income Tax (2010) 328 ITR 81
(Bom.) had referred to Section 14(2) of the Act and observed:-
Under sub-section (2), the Assessing Officer is required to
determine the amount of expenditure incurred by an assessee
in relation to such income which does not form part of the
total income under the Act in accordance with such method
as may be prescribed. 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 regard to the
accounts of the assessee. The satisfaction of the Assessing
Officer must be arrived at on an objective basis. It is only
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when the Assessing Officer is not satisfied with the claim of
the assessee, that the Legislature directs him to follow the
method that may be prescribed. In a situation where the
accounts of the assessee furnish an objective basis for the
Assessing Officer to arrive at a satisfaction in regard to the
correctness of the claim of the assessee of the expenditure
which has been incurred in relation to income which does
not form part of the total income, there would be no warrant
for taking recourse to the method prescribed by the rules.
For, it is only in the event of the Assessing Officer not being
so satisfied that recourse to the prescribed method is
mandated by law. Sub-section (3) of section 14A provides
for the application of sub-section (2) also to a situation
where the assessee claims that no expenditure has been
incurred by him in relation to income which does not form
part of the total income under the Act. Under the proviso, it
has been stipulated that nothing in the section will empower
the Assessing Officer, for an assessment year beginning on
or before April 1, 2001, either to reassess under section 147
or pass an order enhancing the assessment or reducing the
refund already made or otherwise increasing the liability of
the assessee under section 154.
16. Equally illuminating are the following observations in Godrej and
Boyce Mfg. Co. Ltd. (supra)
... However, if the assessee does not maintain separate
accounts, it would be necessary for the Assessing Officer to
deter-mine the proportion of expenditure incurred in relation
to the dividend business (i.e., earning exempt income). It is
for exactly such situations that a machinery/method for
computing the proportion of expenditure incurred in relation
to the dividend business has been provided by way of
section 14A(2)/(3) and rule 8D.
17. More important and relevant for us are the observations in Godrej and
Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction
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being recorded by the Assessing Officer with reference to the accounts
under Section 14(2) of the Act and Rule 8D(1) of the Rules. It was
observed:-
Parliament has provided an adequate safeguard to the
invocation of the power to determine the expenditure
incurred in relation to the earning of non-taxable income by
adoption of the prescribed method. The invocation of the
power is made conditional on the objective satisfaction of
the Assessing Officer in regard to the correctness of the
claim of the assessee, having regard to the accounts of the
assessee. When a statute postulates the satisfaction of the
Assessing Officer "Courts will not readily defer to the
conclusiveness of an executive authority's opinion as to the
existence of a matter of law or fact upon which the validity
of the exercise of the power is predicated". (M. A. Rasheed
v. State of Kerala [1974] AIR 1974 SC 2249*). A decision
by the Assessing Officer has to be arrived at in good faith on
relevant considerations. The Assessing Officer must furnish
to the assessee a reasonable opportunity to show cause on
the correctness of the claim made by him. In the event that
the Assessing Officer is not satisfied with the correctness of
the claim made by the assessee, he must record reasons for
his conclusion. These safeguards which are implicit in the
requirements of fairness and fair procedure under article 14
must be observed by the Assessing Officer when he arrives
at his satisfaction under sub-section (2) of section 14A. As
we shall note shortly hereafter, sub-rule (1) of rule 8D has
also incorporated the essential requirements of sub-section
(2) of section 14A before the Assessing Officer proceeds to
apply the method prescribed under sub-rule (2).
18. It is in this context we feel that the findings recorded by the CIT(A)
and the Tribunal are appropriate and relevant. The clear findings are that the
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assessee had sufficient funds for making investments in shares and mutual
funds. The said findings coupled with the failure of the Assessing Officer to
hold and record his satisfaction clinches the issue in favour of the
respondent assessee and against the Revenue. The self or voluntary
deductions made by the assessee were not rejected and held to be
unsatisfactory, on examination of accounts. Judgments in Tin Box Co.
(supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd.
(supra) and East India Pharmaceutical Works Ltd. (supra) would be
relevant if the satisfaction of the Assessing Officer is in issue, and such
question of satisfaction is with reference to the accounts.
19. However, the decisions relied upon by the Tribunal in the case of Tin
Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy
Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not
be now applicable, if we apply and compute the disallowance under Rule 8D
of the Rules. The said Rule in sub Rule (2) specifically prescribes the mode
and method for computing the disallowance under Section 14A of the Act.
Thus, the interpretation of clause (ii) to sub Rule (2) to Rule 8D of the Rules
by the CIT(A) and the Tribunal is not sustainable. The said clause expressly
states that where the assessee has incurred expenditure by way of interest in
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the previous year and the interest paid is not directly attributable to any
particular income or receipt then the formula prescribed would apply. Under
clause (ii) to Rule 8D(2) of the Rules, the Assessing Officer is required to
examine whether the assessee has incurred expenditure by way of interest in
the previous year and secondly whether the interest paid was directly
attributable to particular income or receipt. In case the interest paid was
directly attributable to any particular income or receipt, then the interest on
loan amount to this extent or in entirety as the case may be, has to be
excluded for making computation as per the formula prescribed. Pertinently,
the amount to be disallowed as expenditure relatable to exempt income,
under sub Rule (2) is the aggregate of the amount under clause (i), clause (ii)
and clause (iii). Clause (i) relates to direct expenditure relating to income
forming part of the total income and under clause (iii) an amount equal to
0.5% of the average amount of value of investment, appearing in the balance
sheet on the first day and the last day of the assessee has to be disallowed.
20. However, in the present case we need not refer to sub Rule (2) to Rule
8D of the Rules as conditions mentioned in sub Section (2) to Section 14A
of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied
and the Assessing Officer erred in invoking sub Rule (2), without
ITA 115/2014 & 119/2014 Page 19 of 20
elucidating and explaining why the voluntary disallowance made by the
assessee was unreasonable and unsatisfactory. We do not find any such
satisfaction recorded in the present case by the Assessing Officer, before he
invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation.
Therefore, the respondent assessee would succeed and the appeal should be
dismissed.
The appeals are accordingly dismissed with no order as to costs.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
NOVEMBER 25, 2014/km
ITA 115/2014 & 119/2014 Page 20 of 20
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