DCIT, New Delhi V. M/s. Eicher Motors Ltd., New Delhi

ITA 527/DEL/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7543 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 29-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY VOHARA; GAURAV JAIN UPVAN GUPTA S
• Assessee Lawyers: PARWINDER KAUR
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A; 154

Judgement Text

IN TH E INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B : NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO. 208 /DEL /201 3 ASSESSMENT YEA R : 200 8 - 200 9 M/S EICHER MOTORS LTD. (ERSTWHILE VS. D CIT, CIRCLE 11(1) EICHER GOODEARTH INVESTMENT LTD. ) NEW DELHI 3 RD FLOOR, SELECT CITY WALK A - 3, DIST. CENTRE, SAKET , NEW DELHI - 1100 17. IT A NO.527 /DEL /2013 ASSESSMENT YEAR: 2008 - 2009 DCIT, CIRCLE 11(1), VS. M/S EICHER MOTORS LIMITED NEW DELHI. (ERSTWHILE EICHER GOODEARTH INVESTMENT LTD.) 3 RD FLOOR, SELECT CITY WALK, A - 3 DIST. CENTRE SAKET NEW DELHI (APPELLANT ) (RESPONDENT) APP ELLANT BY : SHRI AJAY VOHARA, AND MS. GAURAV JAIN, UPVAN GUPTA, ADVOCATE S RESPONDENT BY: SMT. PARWINDER KAUR, CIT.DR ORDER PER SHRI GEORGE GEORGE K , J M : 1. THESE ARE CROSS APPEAL S DIRECTED AGAINST THE CIT ( A) S ORDER DATED 05 . 11 .201 2 . T HE RELEVAN T ASSESSMENT YEAR IS 200 8 - 0 9 . ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 2 2. THE EFFECTIVE GROUNDS RAISED IN THE SE APPEAL S OF THE REVENUE A S WELL AS THE ASSESSEE ARE AS FOLLOWS: - ITA NO.527/DEL/2013 (REVENUE S APPEAL) I) . ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERR ED IN DELETING THE ADDITION OF RS. 1,38,28,931/ - MADE UNDER SECTION 14A READ WITH RULE 8D OF IT RULES, 1962. ITA NO.208/DEL/2013 (ASSESSEE S APPEAL) 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) - XIII, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LA W IN CONFIRMING THE DISALLOWANCE OF NOTIONAL ADMINISTRATIVE EXPENSES OF RS.32,05,765/ - U/S 14A OF THE INCOME TAX ACT ALLEGEDLY RELATING TO DIVIDEND INCOME. 3. THE BRIEF FACTS OF THE CASE ARE AS FOLLOWS : - IN THE PREVIOUS YEAR RELEVANT TO THE A SSESSMENT YEAR, THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.1,95,20,794/ - . THE ASSESSEE HAD INCURRED INTEREST EXPENDITURE AND FINANCIAL CHARGES OF RS.3,53,90,000/ - . THE SCRUTINY ASSESSMENT U/S 143(3) OF THE ACT WAS COMPLETED BY DISALLOWING A SUM OF RS. 2,76,62,235/ - U/S 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULE, 1962. SUBSEQUENTLY , DISALLOWANCE U/S 14A WAS REDUCED BY THE AO TO RS.1,70,34,696/ - VIDE ORDER DATED 23.02.2012 PASSED U/S 154 OF THE ACT. THE AO APPLIED RULE 8D OF THE IT RULE AND D ISALLOWED AN AMOUNT OF RS.1,70,34,690/ - , COMPRISING THE FOLLOWING : I) -- UNDER RULE 8D ( 2 ) (II) RS.1,38,28,931/ - II) -- UNDER RULE 8D ( 2 ) (III) RS. 32,05,765/ - TOTAL RS.1,70,34,690/ - ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 3 4. AGGRIEVED BY THE DISALLOWANCE, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. THE CIT (A) , AFTER CONSIDERING THE FINANCIAL STATEMENT OF THE ASSESSE E , ENTIRELY DELETED THE DISALLOWANCE OF INTEREST EXPENDITURE MADE BY THE AO UNDER RULE 8D ( 2 ) (II) OF THE IT RULE. THE CIT (A) HAD , HOWEVER , SUSTAINED THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDER RULE 8 D ( 2 ) (III). 5. AGAINST THE ORDER OF THE CIT (A) , BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL S BEFORE US. THE L D. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE INCO ME TAX AUTHORITIES. THE LD. DR RELIED ON THE ASSESSMENT ORDER. 6. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE SHALL CONSIDER THE DISALLOWANCE S BY INVOKING RULE 8D2(II) AND 8D ( 2 ) (III) OF I.T. RULES, SEPARATELY AS UNDER: D ISALLOWANCE UNDER RULE 8D ( 2 ) (II) OF RS.1, 38, 28,931/ - . THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO UNDER RULE 8D ( 2 ) (II) AMOUNTING TO RS.1,38,28,931/ - BY OBSERVING THE FOLLOWING: - ( ON PG.7) DUR ING THE YEAR , THE APPELLANT MADE FRES H INVESTMENT AGGREGATING TO RS. 7168.42 LACS (INCLUDING THE SHARES SOLD), DURING THE YEAR OUT OF SURPLUS FUNDS. THE APPELLANT HAS GIVEN WORKING OF CASH FLOW STAT E MENT AT PAGE 7 OF THE PAPER BOOK WHEREIN IT IS SHOWN THAT THERE WAS AN INFLO W OF INTEREST FREE FUNDS OF RS. 9452.71 LACS FROM SALE OF VARIOUS INVESTMENTS WHICH WAS SUFFICIENT TO COVER INVESTMENTS MADE DURING THE YEAR. IT IS ALSO SEEN THAT APPELLANT DID NOT MAKE ANY FRESH BORROWING DURING T HE YEAR UNDER CONSIDERATI ON; ON THE CONTRARY THE APPEL LANT HAS REPAID RS.1593.20 LACS DURING THE YEAR FROM THE LOANS CARRIED FORWARD ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 4 AS ON 01.04.2007. THEREFORE , THERE IS NO NEXUS BETWEEN THE FUNDS BORROWED AND INVESTMENTS MADE DURING THE YEAR. THE FUNDS WERE BORROWED IN EARLIER Y EARS AND ON WHICH INTEREST OF RS.3,50,93,000/ - WERE PAID BY THE APPELLANT. THERE IS NO NEXUS BETWEEN THE INVESTMENTS AND FUNDS BORROWED; THEREFORE, INTEREST PAID ON FUNDS BORROWED CANNOT BE ATTRIBUTED FOR EARNING EXEMPT INCOME DURING THE YEAR. THE ASSESSIN G OFFICER HAS ALSO NOT ESTABLISHED ANY NEXUS BETWEEN THE INVESTMENTS MADE AND INTEREST EXPENDITURE INCURRED BY THE APPELLANT. IN VIEW OF THE FACTS STATED ABOVE, IT IS HELD THAT NO DISALLOWANCE OF INTEREST EXPENDITURE RELATING TO EARNING EXEMPT INCOME CAN B E MADE UNDER RULE 8D ( 2 ) ( II) OF THE IT RULE 1962. THE DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.1,38,28,931/ - IS , THEREFORE, DELETED. 7. THE A O HAS TO GIVE A FINDING THAT THE ASSESSEE IS INCURRED INTEREST EXPENSES FOR EARNING EXEMPT INCOME. IN THE AB SENCE OF SUCH A FINDING, THE AO HAS NO POWER TO COMPUTE THE DISALLOWANCE U/S 14A READ WITH RULE 8D EVEN FOR AY 2008 - 09 ONWARDS . THE FOLLOWING JUDICIAL PRONOUNCEMENT S SUPPORT THE ABOVE PREPOSITION OF LAW: CIT VS. WALFORT SHARE & STOCK BROKERS: 326 ITR 1 (SC ) GODREJ & BOYCE MFG. CS. LTD. V. C I T: 328 FTR 81 (BOM.) MAXOPP INVESTMENT LTD . VS. C1T 247 CTR 162 (DEL.) CIT VS. HERO CYCLES: 323ITR 518 (P&H) C I T V. METALMAN AUTO P. LTD.: 336 ITR 434 (P&H) CIT V. RELIANCE INDUSTRIES LTD. : 339ITR 632 (BOM) CHEMIC AL & METTALLURGICAL DESIGN CO. LTD: ITA NO. 80312008 (DELHI HC) CIT VS MS. SUSHMA KAPOOR: 3I9 ITR 299 ( D ELHI) ACITV. S I L INVESTMENT LTD . ITA NO.2431/ DEL / 20 1 0 (DEL.) 8. EVEN OTHERWISE, OUT OF AGGREGATE INVESTMENTS OF RS.4,682.68 LACS , INVESTMENTS OF RS .2,634.08 LACS VESTED WITH THE ASSESSEE ON ACCOUNT OF ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 5 AMALGAMATION OF GROUP COMPANIES. FURTHER, THE QUANTUM OF INVESTMENTS (FROM RS.12,1140.38 LACS TO RS.8,682.68 LACS) AND LOANS (RS.6,590.93 LACS TO RS.2,500.10 LACS) HA VE DECREASED DURING THE RELEVANT ASS ESSMENT YEAR WHEREAS THE ASSESSEE HAD SUFFICIENT CASH FUNDS AVAILABLE ON ACCOUNT OF CASH FROM SALE OF CURRENT INVESTMENTS OF RS.9,452.71 LACS . THESE FIGURES ARE EVIDENT FROM THE PERUSAL OF THE BALANCE SHEET, P&L ACCOUNT AND CASH FLOW STATEMENT FILED BY THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. THE AO HAS NOT ESTABLISHED ANY NEXUS BETWEEN THE INVESTMENT MADE AND THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE. IN VIEW OF THE AFORESAID REASONING, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF THE CIT (A). THEREFORE, THIS GROUND OF THE REVENUE IS DISMISSED. ITA NO.208/DEL/2013 (ASSESSEE S APPEAL) DISALLOWANCE UNDER RULE 8D ( 2 ) (III) OF RS.32,05,765/ - 10. THE CIT (A) HAD SUSTAINED THE DISALLOWANCE U/S 14A R. W. S. RULE 8D ( 2 ) (III) BY GIVING THE FOLLOWING REASONING : (ON PAGE 8) AS REGARD TO THE DISALLOWANCE UNDER SECTION 14A ON ACCOUNT OF ADMINISTRATIVE EXPENSES AS PER RULE 8D AMOUN TI NG TO RS 32,05,765 / - , I AM NOT IN AGREEMENT WITH THE APPELLANT'S ARGUMENT THA T T HEY HAVE NOT INCURRED ANY EXPENDITURE ON INVESTMENTS AND EARNING DIVIDEND INCOME . THE APPELLANT HAS CONTENDED THAT IT HAS INCURRED AN EXPENDITURE O F RS. 80.33 L AC S IN VARIOUS HEADS DURING THE YEAR. THE APPELLANT CONTENDED THAT THERE IS NO PROXIMATE NEXUS BETWEEN EARNING OF DIVIDEND INCOME AND THE EXPENDITURE INCURRED BY IT. THE EXPENDITURE HAS BEEN INCURRED UNDER DIFFERENT HEADS BUT THERE IS NO EXPENDITURE ON INVESTMENTS ACTIVITIES. IN MY VIEW THERE IS NO CONCEPT OF FREE LUNCH IN ANY COMMERCIAL TRANSACTIO NS AS THE MAKING OR WITHDRAWING FROM INVESTMENTS (WHICH EARNS THE EXEMPT INCOME) IS NOT IN THE NATURE OF ANY PASSIVE ACTIVITY INVOLVING NO INPUT. IN - FACT, IN MY ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 6 VIEW A. MAKING OF INVESTMENT B. MAINTAINING OR CONTINUING WITH ANY INVESTMENT IN A PARTICULAR SHARE/MUTUAL FUNDS ETC. , AND C. EVEN THE TIME WHEN TO EXIST FROM ONE INVESTMENT TO ANOTHER ALL THESE ACTIVITIES ARE WELL COORDINATED AND WELL INFORMED MANAGEMENT DECISIONS, INVOLVING NOT ONLY INPUTS FROM VARIOUS SOURCES BUT ALSO IT INVOLVES ACUMEN OF SENI OR MANAGEMENT FUNCTIONARIES WHETHER THEY SIT IN SUBSIDIARY COMPANY OR HOLDING COMPANY. THERE ARE INCIDENTAL ADMINISTRATION EXPENSES ON COLLECTING INFORMATION, RESEARCH ETC. WHICH HELPS IN ARRIVING AT A PARTICULAR INVESTMENT DECISIONS AND THESE EXPENSES, RE L ATING TO EARNING OF INCOME ARC E M BEDDED IN THE INDIRECT EXPENSES. THE INVESTMENTS MADE BEING CONSCIOUS DECISIONS AND HAVING DEPLOYMENT OF THE FUNDS BRINGS INTO PICTURE THE EXPENDITURE BY WAY O F COS T OF FUNDS 'INVESTED'. ACCORDINGLY, I AM OF THE CONSIDER ED VIEW THAT THE ASSESSEE HAS INCURRED VARIOUS INDIRECT EXPENSES FOR EARNING EXEMPT INCOME AND SUCH EXPENSES HAVE BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT. THERE MAY NOT BE A DIRECT HEAD RELATING TO INVESTMENT EXPENDITURE BUT ALL INTEREST EXPENSES DEBIT ED TO PROFIT AND LOSS ACCOUNT INDIRECTLY RELATES TO INVESTMENT ACTIVITIES ALSO. THE ASSESSING OFFICER MAY NOT HAVE GIVEN ANY FINDING IN THIS REGARD BUT THE POWERS OF THE CIT (APPEAL) ARE CO - TERMINUS WITH THAT OF ASSESSING OFFICER. THEREFORE, USING THOSE PO WERS I AM SATISFIED THAT APPELLANT HAS INCURRED VARIOUS INDIRECT EXPENSES ON ADMINISTRATION WHICH ARE INDIRECTLY RELATED TO INVESTMENT ACTIVITIES AND EARNING OF EXEMPT INCOME. THEREFORE, THE DISALLOWANCE U/S 14A READ WITH RULE 8 D2(III) HAS TO BE DONE. B Y APPLYING THE SAME, I COMPUTE THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8 D(2)(III) AT RS.32,05,765/ - BEING 0.5% OF AVERAGE INVESTMENTS OF RS.64,11,53,000/ - AND THEREBY DISALLOWANCE IS WARRANTED UNDER RULE 8 D(2)(III). HENCE, THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES MADE BY THE ASSESSING OFFICER OF RS.32,05,765/ - OF 0.5% OF THE AVERAGE INVESTMENT IS CONFIRMED . 10.1. DURING THE COURSE OF HEARING BEFORE US, THE LEARNED AR SUBMITTED, AMONG OTHERS, THAT DURING THE RELEVANT PREVIOUS YEAR, APAR T FROM INTEREST AND ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 7 DEPRECIATION, THE ASSESSEE HAD INCURRED THE FOLLOWING EXPENSES, AGGREGATING TO RS.80.33 LAKHS, UNDER VARIOUS HEADS: RS. IN LAKHS RATES AND TAXES 01.81 REPAIRS AND MAINTENANCE: BUILDING 05.70 PLANT & MACHINERY - OTHERS 00.85 INSURANCE 00.0 1 COMMUNICATION 00.67 CONSULTANCY & PROFESSIONAL CHARGES 25.79 COMMISSION & BROKERAGE 09.27 DIRECTOR S SITTING FEES 00.30 BANK CHARGES 34.43 MISCELLANEOUS EXPENSES 01.50 10.1.1. IN VIEW OF THE ABOVE DETAILS , THE LD. AR ARGUED THAT THERE WAS NO EXPENDITURE HAVING PROXIMATE NEXUS / DIRECT RELATION WITH INVESTMENT IN SHARES OR EARNING OF EXEMPT DIVIDEND INCOME THEREFROM. TO ILLUSTRATE FURTHER , IT WAS SUBMITTED THAT REPAIRS OF BUILDING OR PLANT AND MACHINERY HAD NO NEXUS WITH INVESTMENT IN SHARES / MUTUAL FUNDS. SIMILARLY, IT WAS ARGUED THAT RATES AND TAXES, INSURANCE, AUDITOR S FEE ETC., HAVE BEEN INCURRED TO COMPLY WITH VARIOUS STATUTORY OBLIGATIONS AND, THUS, IT WAS POINTED OUT THAT THE SAME HAD NO NEXUS WITH INVESTMENT IN SHARES / MUTUAL FUNDS. [ REFER: PAGES 87 & 88 OF PB AR]. 10.1.1.2. IN CONCLUSION, IT WAS SUBMITTED THAT NO PORTION OF THE EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT HAD PROXIMATE NEXUS WITH INVESTMENTS IN SHARES OR EARNING OF DIVIDEND INCOME THEREFROM, WARRANTING ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 8 DISALLOWANCE U/S 14A OF THE ACT, LEAVE ALONE ATTRIBUTION AT 0.5% OF AVERAGE VALUE OF INVESTMENTS I N ACCORDANCE WITH THE PROVISIONS OF RULE 8D OF I.T. RULES. IT WAS, THEREFORE, PLEADED THAT THE DISALLOWANCE U/S 14A OF THE ACT REQUIRES TO BE DELETED. ON THE OTHER HAND, THE LD. DR PRESENT SUPPORTED THE STAND OF THE CIT (A) ON THE ISSUE. 10.2. WE HAVE CAR EFULLY CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIALS ON RECORD. ON A CAREFUL PERUSAL OF THE FINDINGS OF THE CIT (A), IT WAS OBSERVED THAT THE CIT (A) HAD RECORDED THAT (AT THE COST OF REPETITION) .. THE ASSESSEE HAS INCURRED VA RIOUS INDIRECT EXPENSES FOR EARNING EXEMPT INCOME AND SUCH EXPENSES HAVE BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT. THERE MAY NOT BE A DIRECT HEAD RELATING TO INVESTMENT EXPENDITURE BUT ALL INTEREST EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT INDIRECTLY RELATES TO INVESTMENT ACTIVITIES ALSO . THE ASSESSING OFFICER MAY NOT HAVE GIVEN ANY FINDING IN THIS REGARD .. . APPARENTLY, THIS ISSUE, IN OUR VIEW, HAD NOT BEEN CONSIDERED BY THE AO COMPREHENSIVELY. 10 .2.1. AT THIS POINT OF TIME, WE REFER TO THE JUDGM ENT OF THE HON BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA). AFTER DUE CONSIDERATION OF THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF CIT V. WALFORT SHARE & STOCK BROTHERS [326 ITR 1(SC)], THE HON BLE COURT HAD ANALYZED THE SCOPE OF PROVISIONS OF S. 14A AND THE POWERS VESTED WITH THE AO BEFORE INVOKING THE SAME. THE HON BLE COURT HELD THAT THE EXPRESSION EXPENDITURE INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 9 EXPENDITURE. IT WAS HELD THAT THE PROVISION S OF SUB - SECTION (2) / (3) OF S.14A READ WITH RULE 8D OF THE I.T. RULES CAN BE APPLIED FROM THE AY 2008 - 09 AND ONWARDS, ONLY IF THE AO FIRST REJECTS THE CLAIM OF THE ASSESSEE OF HAVING NOT INCURRED ANY EXPENDITURE IN RELATION TO EARNING OF EXEMPT INCOME WI TH COGENT REASONS. IN OTHER WORDS, THE ONUS IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES WITH EXEMPT INCOME BEFORE REJECTING THE CLAIM OF THE ASSESSEE AND COMPUTING DISALLOWANCE U/S 14A AS PER RULE 8D OF THE I.T. RULES. THE RELEVANT OBSERVATIONS OF THE HO N BLE COURT ARE AS UNDER: THUS, WE WILL HAVE TO CONSIDER THE ARGUMENT OF THE ASSESSES IN RESPECT OF THE EXPRESSION EXPENDITURE INCURRED IN THE CONTEXT OF THE EXPENDITURE BEING IN CONNECTION WITH OR PERTAINING TO INCOME WH ICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. 27. A REFERENCE WAS MADE TO THE DECISION OF THE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT II V. HERO CYCLES LTD [ITA NO.331/2009: DECIDED ON 4/11/2009] WHEREIN IT WAS OBSERVED THAT: - DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. 28. IT WAS CONTENDED THAT UNLESS AND UNTIL THERE W AS ACTUAL EXPENDITURE FOR EARNING THE EXEMPTED INCOME, THERE COULD NOT BE ANY DISALLOWANCE UNDER SECTION 14A. WHILE WE AGREE THAT THE EXPRESSION EXPENDITURE INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDITURE WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLATION UNDER SECTION 14A(1) OF THE SAID ACT IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT INCOME. THE COROLLARY TO THIS IS THAT IF NO EXPENDITURE IS INCURR ED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE SAID ACT. SCOPE OF SUB - SECTIONS (2) AND (3) OF SECTION 14A ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 10 29. SUB - SECTION (2) OF SECTION 14A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS T O DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH 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 EXPENDI TURE 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 TH E 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 SATISF IED 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 W HERE 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 EXPEND ITURE 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 OF FICER, 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 MENTION ED 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 EXPENDITUR E INCURRED 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 T HE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 11 CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. RULE 8D 30. AS WE HAVE ALREADY NOTICED, SUB - SECTION (2) OF SECTION 1 4A 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 /2008 DATED 24/3/2008, 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 ASSESSE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A ) THE CORRECTNESS OF THE CLAIM OF 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 - SECTION S (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 CORR ECTNESS OF THE CLAIM MADE BY THE ASSESSE 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 IN RELATION TO INCOME NOT INCLUDABLE IN TOT AL INCOME IN THE MANNER INDICATED IN SUB - RULE (2) OF RULE 8D OF THE SAID RULES. 31. 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 REE CTS THE CLAIM OF THE ASSESSE 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 R ELATING 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 PARTIC ULAR INCOME ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 12 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 F ROM 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 PER CENT 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 ASSESSE, 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 INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE OF ONE HALF PER CENT OF THE AVERAGE VALUE OF THEINVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. 10 .2.2. FURTHER, THE HON BLE MUMBAI TRIBUNAL HAD, IN THE CASE OF M/S MULTI COMMODITY EXCHANGE OF (INDIA) LTD V. DCIT IN ITA NO.1050/MUM/2010 RELATING TO THE ASSESSMENT YEAR 2008 - 09, OBSERVED AS UNDER: IT IS CLEAR FROM THE OBSERVATIONS OF THE HON BLE BOMBAY HIGH COURT RE FERRED TO ABOVE THAT THE APPLICATION OF RULE 8D OF THE RULES IS NOT AUTOMATIC. WHEN THE ASSESSEE MAKES THE CLAIM REGARDING THE QUANTUM OF EXPENSES TO BE DISALLOWED IN TERMS OF SECTION 14A OF THE ACT, IT WAS INCUMBENT ON THE PART OF THE ASSESSING OFFICER T O CONSIDER THE CLAIM OF THE ASSESSEE. IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE HE CAN HAVE RECOURSE WITH THE PROVISIONS OF RULE 8D OF THE INCOME - TAX RULES. THE SATISFACTION THAT THE CLAIM MADE BY THE ASSESSEE REGARDING EXPENSES INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, IS NOT CORRECT, HAS TO BE ARRIVED AT BY THE ASSESSING OFFICER, ON AN OBJECTIVE BASIS. IN THE PRESENT CASE, WE FIND THAT THE ASSESSING ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 13 OFFICER HAS PROCEEDED TO APPLY RULE 8D WITHOUT GIVING ANY FINDING WITH REGARD TO THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE REGARDING THE DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT . 10 .2.3. THUS, EVEN FOR THE ASSESSMENT YEAR 2008 - 09 AND ONWARDS, THE DISALLOWANCE U/S 14A READ WITH RULE 8D OF I.T. RULES CAN BE RESORTED TO ONLY IF THE AO, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, REACHES A FINDING THAT THE ASSESSEE HAD INCURRED ACTUAL EXPENSES WHICH HAVE PROXIMATE NEXUS WITH THE EARNI NG OF EXEMPT INCOME. HOWEVER, CIT(A) HELD THAT I AM SATISFIED THAT APPELLANT HAS UNSECURED VARIOUS INDIRECT EXPENSES ON ADMINISTRATION WHICH ARE INDIRECTLY RELATED TO INVESTMENT ACTIVITIES AND EARNING OF EXEMPT INCOME. THEREFORE, THE DISALLOWANCE U/S 1 4A READ WITH RULE 8D2(III) HAS TO BE DONE. BY APPLYING THE SAME, I COMPUTE THE DISALLOWANCE U/S 14A READ WITH RULE 8D(2)(III) AT RS.32,05,765/ - BEING 0.5% OF AVERAGE INVESTMENT OF RS.64,11,53,000/ - THEREFORE, CIT(A) HAS RECORDED A FINDING THAT CERTAIN A DMINISTRATIVE EXPENSES WERE RELATABLE TO EARNING OF EXEMPT INCOME. BUT HE TAKEN ALL THE EXPENSES DEBITED TO P&L A/C FOR THE PURPOSE OF CALCULATION DISALLOWANCE U/S 14A. THE CIT(A) OUGHT TO LIMITED THE DISALLOWA NCE TO ONLY THOSE ADMINISTRATIVE EXPENSES WH ICH ARE DIRECTLY RELATABLE TO EARNING EXEMPT INCOME. MANY EXPENSES DEBITED TO P&L A/C DOES NOT HAVE PROXIMATE NEXUS/DIRECT RELATION WITH INVESTMENT IN SHARES OR EARNING OF EXEMPT DIVIDEND INCOME THERE OF . FOR EXAMPLE THE EXPENSES OF REPAIR OF BUILDING OR PL ANT AND MACHINERY HAD NO NEXUS WITH INVESTMENT IN SHARES/MUTUAL FUND. SIMILARLY, RATES AND TAXES, INSURANCE, AUDITOR FEE ETC. HAVE ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 14 BEEN INCURRED TO COMPLY WITH VARIOUS STATUTORY OBLIGATIONS AND SAME HAS NO NEXUS WITH THE INVESTMENT IN SHARES/ MUTUAL FUNDS. THEREFORE, AS MENTIONED EARLIER, THE CIT(A) OUGHT TO HAVE LIMITED THE DISALLOWANCE TO THE ADMINISTRATOR EXPENSES WHICH ARE DIRECTLY RELATABLE TO EARNING OF EXEMPT INCOME. 10 .2.4. TAKING INTO ACCOUNT THE ABOVE FACTS AND ALSO KEEPING THE (I) JUDGMENT OF T HE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD; AND (II) THE FINDINGS OF THE HON BLE MUMBAI TRIBUNAL (SUPRA)IN VIEW, WE DEEM IT FIT TO RESTORE THE ISSUE ON THE FILE OF THE AO WITH A DIRECTION TO RECORD A FINDING TO THE EFFECT TH AT THE ASSESSEE INCURRED ACTUAL EXPENSES WHICH HAD PROXIMATE NEXUS WITH EARNING OF EXEMPT INCOME AND IF THE EXPENSES WERE DIRECTLY RELATABLE TO THE EARNING OF EXEMPT INCOME, THEN THE DISALLOWANCE IS TO BE LIMITED TO THE ADMINISTRATIVE EXPENSES WHICH WERE D IRECTLY RELATABLE TO EARNING OF SUCH EXEMPT INCOME. FOR THIS EXERCISE AT THE LEVEL OF THE AO, THE ISSUE IS RESTORED ON THE FILE OF THE AO. IT IS ORDERED ACCORDINGLY. 11. IN THE RESULT : (I) THE REVENUE S APPEAL IS DISMISSED; & (II) THE ASSESSEE S AP PEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. TH E DECISION WAS PRONOUNCED IN THE OPEN COURT ON 1 2 TH DECEMBER , 201 4 . SD/ - SD/ - ( J.S. REDDY ) (GEORGE GEORGE K.) A CCOUNTANT MEMBER J UDICIAL MEMBER DATED: DECEMBER , 12 TH 201 4 . AKS/ - ITA NO. 208 &5 27 /DEL /201 3 ASSESSMENT YEAR : 200 8 - 0 9 15 COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST . REGISTRAR, ITAT, NEW DELHI