Eicher Motors Ltd, New Delhi V. ITO, New Delhi

ITA 793/DEL/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7578 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 10-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 07-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PARWINDER KAUR
• Assessee Lawyers: AJAY VOHARA; GAURAV JAIN UPVAN GUPTA S
• Keywords: Earning of tax free income
• Section: 143(3); 14A

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. 793 /DEL /201 3 ASSESSMENT YEAR : 200 9 - 20 10 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. ITA NO. 1106 /DEL /2013 ASSESSMENT YEAR: 200 9 - 20 10 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 ) APPELLANT 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 APPEALS DIRECTED AGAINST THE ORDER OF THE CIT (A) - XIII, NEW DELHI DATED 14.12.2012. THE RELEVANT ASSESSMENT YEAR IS 2009 - 10 . 2. THE EFFECTIVE GROUNDS RAISED IN THESE APPEALS OF THE REVENUE AS WELL AS THE ASSESSEE ARE AS FOLLOWS: - ITA NO S . 793&1106 /DEL /201 3 2 ITA NO.1106/DEL/2013 (REVENUE S APPEAL) I). ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.1,33,48,461/ - MADE UNDER SECTION 14A READ WITH RULE 8D OF IT RULES, 1962. ITA NO.793/DEL/2013 (ASSESSEE S APPEAL) 1. THAT THE LD. CIT (A) HAS GROSSLY ERRED IN CONFIRMING THE DISALLOWANCE OF NOTIONAL ADMINISTRATIVE EXPENSES OF RS.39,07,000/ - U/S 14A R. W. RULE 8D OF THE I T RULES ALLEGEDLY RELATING TO DIVIDEND INCOME. 3. THE BRIEF FACTS OF THE CASE ARE AS FOLLOWS: - IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR, THE ASS ESSEE HAD RECEIVED DIVIDEND INCOME OF RS.10,93,12,057/ - . THE ASSESSEE HAD INCURREDINTEREST EXPENDITURE OF RS.180.41 LAKHS. THE SCRUTINY ASSESSMENT U/S 143(3) OF THE ACT WAS COMPLETED BY DISALLOWING A SUM OF RS.1,72,55,461/ - U/S 14A OF THE ACT READ WITH RUL E 8D OF THE INCOME TAX RULE, 1962. 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 ASSESSEE, DELETED THE DISALLOWANCE OF INTEREST EXPENDI TURETO THE EXTENT OF RS.1,33,48,461/ - MADE BY THE AO UNDER RULE 8D (2) (II) OF THE IT RULES. THE CIT (A) HAD, HOWEVER, SUSTAINED THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES UNDER RULE 8 D (2)(III) OF I.T.RULES TO THE EXTENT OF RS.39,07,000/ - . 5. AGAINST T HE ORDER OF THE CIT (A), BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE INCOME TAX AUTHORITIES. THE LD. DR RELIED ON THE ASSESSMENT ORDER. 6. WE HAVE HEARD RIVAL SUBMISSI ONS AND PERUSED THE MATERIAL ON RECORD. WE SHALL CONSIDER THE DISALLOWANCES BY INVOKING RULE 8D (2)(II) AND 8D (2)(III)OF I.T. RULES, SEPARATELY, AS UNDER: DISALLOWANCE UNDER RULE 8D(2)(II) OF RS.1,33,48,461/ - . ITA NO S . 793&1106 /DEL /201 3 3 THE CIT(A) DELETED THE DISALLOWANCE MADE B Y THE AO UNDER RULE 8D(2)(II) AMOUNTING TO RS.1,38,48,461/ - BY OBSERVING THE FOLLOWING: - (ON PG.24) . DURING THE YEAR, THE APPELLANT MADE FRESH INVESTMENTS OF MORE THAN 18,250.04 LACS OUT OF SURPLUS FUNDS RECEIVED FROM SALE O F SHARES. THE APPELLANT HAS GIVEN WORKING OF CASH FLOW STATEMENT AT PAGE 7 OF THE PAPER BOOK WHEREIN IT IS SHOWN THAT THERE WAS AN INFLOW OF INTEREST FREE FUNDS OF RS.26,187.68LACS 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 THE YEAR UNDER CONSIDERATION; ON THE CONTRARY, THE APPELLANT HAS REPAID THE LOAN OF RS.2500.10LACS DURING THE YEAR. THEREFORE, THERE IS NO NEXUS BETWEEN THE FUNDS BORROWED AND INVESTMENTS MADE DURING THE YEAR. THE FUNDS WERE BORROWED IN EARLIER YEARS AND ON WHICH INTEREST OF RS.180.41 LACS WAS PAID BY THE APPELLANT. THERE IS NO NEXUS BETWEEN THE INVESTMENTS AND FUNDS BORROWED; THEREFORE, INTEREST PAID ON FUNDS BORRO WED CANNOT BE ATTRIBUTED FOR EARNING EXEMPT INCOME DURING THE YEAR. THE ASSESSING 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 BE MADE UNDER RULE 8D(2) (II) OF THE IT RULE 1962. THE DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.1,33,48,461/ - IS, THEREFORE, DELETED. 7. THE AO HAS TO GIVE A FINDING THAT THE ASSESSEE IS INCURRED INTEREST EXPENSES FOR EARNING EXEMPT INCOME. IN THE ABSENCE 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 PRONOUNCEMENTS SUPPORT TH E ABOVE PREPOSITION OF LAW: CIT VS. WALFORT SHARE & STOCK BROKERS: 326 ITR 1 (SC) GODREJ & BOYCE MFG. CS. LTD. V. CFT: 328 FTR 81 (BOM.) MAXOPP INVESTMENT LTD VS. C1T 247 CTR 162 (DEL.) CIT VS. HERO CYCLES: 323ITR 518 (P&H) CIT V. METALMAN AUTO P. LTD. : 336 ITR 434 (P&H) CIT V. RELIANCE INDUSTRIES LTD.: 339ITR 632 (BOM) CHEMICAL &METTALLURGICAL DESIGN CO. LTD: ITA NO. 80312008 (DELHI HC) CIT VS. MS.SUSHMAKAPOOR: 3I9ITR 299 (DELHI) ACIT V. SIL INVESTMENT LTD - ITA NO.243/1/DEL/2010(DEL.) ITA NO S . 793&1106 /DEL /201 3 4 8. MOREOVE R, ON A PERUSAL OF THE BALANCE SHEET OF THE ASSESSE, IT WAS EVIDENT THAT THE ASSESSE DID NOT MAKE ANY FRESH BORROWINGS; ON THE CONTRARY, THERE WAS A NET REDUCTION IN TOTAL BORROWING FROM RS.2,500.10 LAKHS TO RS.250.10 LAKHS. DURING THE RELEVANT YEAR, THE ASSESSEE HAD REALIZED INTEREST FREE FUNDS OF RS.26,187.68 LAKHS FROM SALE OF EXISTING INVESTMENTS AND OTHER INCOME LIKE DIVIDEND, INTEREST ETC., WHICH WERE UTILIZED/SUFFICIENT FOR MAKING NET INVESTMENT OF RS.18,250.04 LAKHS DURING THE YEAR. THESE FIGURES A RE 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 HAD NOT ESTABLISHED ANY NEXUS BETWEEN THE INVESTMENT MADE AND THE INTEREST EXPENDITURE INCURRED BY THE ASSE SSEE. 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.793/DEL/2013 (ASSESSEE S APPEAL) DISALLOWANCE UNDER RULE 8D(2)(III) OF RS.39,07,000/ - 9. TH E CIT (A) HAD SUSTAINED THE DISALLOWANCE U/S 14A R. W. S. RULE 8D (2)(III) FORTHE FOLLOWING REASONING: (ON PAGE 25) AS REGARD TO THE DISALLOWANCE UNDER SECTION 14A ON ACCOUNT OF ADMINISTRATIVE EXPENSES AS PER RULE 8D AMOUNTING TO RS. 39,07,000/ - , I AM NOT IN AGREEMENT WITH THE APPELLANT'S ARGUMENT THAT THEY HAVE NOT INCURRED ANY EXPENDITURE ON INVESTMENTS AND EARNING DIVIDEND INCOME. THE APPELLANT HAS CONTENDED THAT IT HAS INCURRED AN EXPENDITURE OF RS.39,07,000/ - OTHER THAN INTEREST EXPENDITURE UNDER VARIO US 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 ACT IVITIES. IN MY VIEW THERE IS NO CONCEPT OF FREE LUNCH IN ANY COMMERCIAL TRANSACTIONS 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 VIEW A. MAKI NG OF INVESTMENT B. MAINTAINING OR CONTINUING WITH ANY INVESTMENT IN A PARTICULAR SHARE/MUTUAL FUNDS ETC., AND ITA NO S . 793&1106 /DEL /201 3 5 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 SENIOR MANAGEMENT FUNCTIONARIES WHETHER THEY SIT IN SUBSIDIARY COMPANY OR HOLDING COMPANY. THERE ARE INCIDENTAL ADMINISTRATION EXPENSES ON COLLECTING INFORMATION, RESEARCH ETC. W HICH HELPS IN ARRIVING AT A PARTICULAR INVESTMENT DECISIONS AND THESE EXPENSES, RELATING TO EARNING OF INCOME ARC CM BEDDED IN THE INDIRECT EXPENSES. THE INVESTMENTS MADE BEING CONSCIOUS DECISIONS AND HAVING DEPLOYMENT OF THE FUNDS BRINGS INTO PICTURE THE EXPENDITURE BY WAY OF COST OF FUNDS 'INVESTED'. ACCORDINGLY, I AM OF THE CONSIDERED VIEW THAT THE APPELLANT 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 INDIRECT 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 BUT THE POWERS OF THE CIT (APPEAL) ARE CO - TERMINUS WITH THAT OF ASSESSING OFFICER. THEREFORE, USING THOSE POWERS I AM SATISFIED THAT APPELLANT HAS INCURRED VARIOUS INDIRECT EXPENSES ON ADMINISTRATION WHICH ARE INDIRECTLY RELATED TO INVESTMENT ACTIVITIES AND EARNING OF EXEMPT INCOM E. THEREFORE, THE DISALLOWANCE U/S 14A READ WITH RULE 8 D (2) (III) HAS TO BE DONE. BY APPLYING THE SAME, I COMPUTE THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8 D(2)(III) AT RS.39,07,000/ - BEING EXPENDITURE DEBITED TO THE & L ACCOUNT OTHER THAN I NTEREST EXPENDITURE. HENCE, THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES MADE BY THE ASSESSING OFFICER OF RS.39,07,000/ - WHICH WAS RESTRICTED TO THE EXTENT OF EXPENSES CLAIMED IN THE P & L ACCOUNT IS CONFIRMED. 9.1. DURING THE COURSE OF HEARING BEFORE U S, THE LEARNED AR, BY EXTENSIVELY QUOTING THE PROVISIONS OF S. 14A OF THE ACT, SUBMITTED THAT THE PROVISIONS OF S. 14A ARE APPLICABLE ONLY IF THE AO AT THE FIRST PLACE FINDS THAT THE ASSESSEE HAD ACTUALLY INCURRED EXPENSES WHICH HAVE PROXIMATE NEXUS WITH E ARNING OF EXEMPT DIVIDEND INCOME AND NOT OTHERWISE. IN OTHER WORDS, IT WAS SUBMITTED, THE ONUS WAS ON THE AO TO FIND PROXIMATE/DIRECT NEXUS OF EXPENSES WITH EARNING OF EXEMPT INCOME, BEFORE REJECTING THE CLAIM OF ASSESSEE AND COMPUTING DISALLOWANCE U/S 14 A OF THE ACT. IT WAS, FURTHER, ARGUED THAT THE PROVISIONS OF SUB - SECTION (2) AND (3) TO S. 14A WHICH EMPOWERS THE AO TO COMPUTE DISALLOWANCE AS PER THE PROVISIONS OF RULE 8D OF I.T. RULES WITH EFFECT FROM THE ASSESSMENT YEAR 2008 - 09 ALSO PROVIDES THAT THE DISALLOWANCE AS PER THE PROVISIONS OF RULE 8D CAN BE COMPUTED, ONLY IF THE AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE ITA NO S . 793&1106 /DEL /201 3 6 AND THAT NO EXPENDITURE IN RELATING TO EXEMPT INCOME HAS BEEN INCURRED BY THE ASSE SSEE. IN OTHER WORDS, IT WAS SUBMITTED, EVEN FROM AY 2008 - 09 AND ONWARDS, THE AO CAN COMPUTE DISALLOWANCE U/S 14A AS PER THE PROVISIONS OF RULE 8D ONLY IF THE AO, HAVING REGARD TO ACCOUNTS OF THE ASSESSEE REACHES A FINDING THAT THE ASSESSEE HAD INCURRED E XPENSES HAVING PROXIMATE NEXUS WITH EARNING OF EXEMPT DIVIDEND INCOME. IN THE ABSENCE OF SUCH A FINDING, IT WAS ARGUED, THE AO DOES NOT HAVE POWER TO COMPUTE DISALLOWANCE U/S 14A AS PER THE PROVISIONS OF RULE 8D EVEN FOR THE AY 2008 - 09 AND ONWARDS. 9.1.1. IN VIEW OF THE ABOVE, THE LD. AR ARGUED THAT THERE WAS NO EXPENDITURE HAVING PROXIMATE NEXUS/DIRECT RELATION WITH INVESTMENT IN SHARES OR EARNING OF EXEMPT DIVIDEND INCOME THERE - FROM. IN CONCLUSION, IT WAS ARGUED THAT NO PORTION OF EXPENDITURE DE BITED TO THE PROFIT AND LOSS ACCOUNT HAD PROXIMATE NEXUS WITH INVESTMENTS IN SHARES OR EARNING OF DIVIDEND INCOME THERE - FROM, WARRANTING DISALLOWANCE U/S 14A OF THE ACT, LEAVE ALONE ATTRIBUTION AT 0.5% OF AVERAGE VALUE OF INVESTMENTS IN 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. TO STRENGTHEN HIS ARGUMENT, THE LD. AR HAD PLACED RELIANCE ON THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE C ASE OF MAXOPP INVESTMENT LTD V. CIT [ 247 CTR 162]. ON THE OTHER HAND, THE LD. DR PRESENT SUPPORTED THE STAND OF THE CIT (A) ON THE ISSUE. 9.2. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIALS ON RECORD. ON A CA REFUL 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 VARIOUS INDIRECT EXPENSES FOR EARNING EXEMPT INCOME AND SUCH EXPENSES HAVE BEEN DEBITED IN THE PROFIT AN D LOSS ACCOUNT. THERE MAY NOT BE A DIRECT HEAD RELATING TO INVESTMENT EXPENDITURE BUT ALL INTEREST EXPENSES DEBITED TO ITA NO S . 793&1106 /DEL /201 3 7 PROFIT AND LOSS ACCOUNT INDIRECTLY RELATES TO INVESTMENT ACTIVITIES ALSO. THE ASSESSING OFFICER MAY NOT HAVE GIVEN ANY FINDING IN THIS R EGARD .. APPARENTLY, THE ISSUE, IN OUR VIEW, HAD NOT BEEN CONSIDERED BY THE AO COMPREHENSIVELY. 9.2.1. AT THIS POINT OF TIME, WE REFER TO THE JUDGMENT OF THE HON BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA). AFTER DUE CONSIDERATI ON 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 EXPENDITURE. IT WAS HELD THAT THE PROVISIONS 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 WITH COGENT REASONS. IN OTHER WORDS, THE ONUS IS ON THE AO TO ESTABLISH NEXUS OF EXPENSES WITH EXEMPT INC OME 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 HON BLE COURT ARE AS UNDER: THUS, WE WILL HAVE TO CONSIDER THE ARGUMENT O F THE ASSESSES IN RESPECT OF THE EXPRESSION EXPENDITURE INCURRED IN THE CONTEXT OF THE EXPENDITURE BEING IN CONNECTION WITH OR PERTAINING TO INCOME WHICH 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 EAR NING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND. 28. IT WAS CONTENDED THAT UNLESS AND UNTIL THERE WAS 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 ITA NO S . 793&1106 /DEL /201 3 8 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 INCURRED IN RELATION TO THE EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A OF THE SAID ACT. SCOP E OF SUB - SECTIONS (2) AND (3) OF SECTION 14A 29. SUB - SECTION (2) OF SECTION 14A 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 DOES NOT FORM PART OF THE TOT AL 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 CO NDITION 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 ASS ESSEE 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 - SECT ION (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 SATISF IED 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 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 30. 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 RELATI ON 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 ITA NO S . 793&1106 /DEL /201 3 9 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 FOR M 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 ASSESSE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CO NDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB - RULE (2) OF RULE 8D OF THE SAID RULES. 31. IT IS THEREFORE, C LEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REECTS THE CLAIM OF THE ASSESSE IN THIS REGARD. IF ONE EXAMINES SUB - RULE (2) OF RULE 8D, WE FIND THAT THE M ETHOD 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 TH E 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 INTERES T [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 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 A ND 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 I S, 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 O F THE AVERAGE VALUE OF THEINVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. ITA NO S . 793&1106 /DEL /201 3 10 9.2.2. FURTHER, THE HON BLE MUMBAI TRIBUNAL HAD, IN THE CASE OF M/S MULTI COMMODITY EXCHANGE OF (INDIA) LTD V. DCIT IN I TA 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 REFERRED TO ABOVE THAT THE APPLICATION OF RULE 8D OF THE RULES IS NOT AUTOMATIC. WHEN THE ASSESSEE MAKES T HE 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 TO CONSIDER THE CLAIM OF THE ASSESSEE. IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CL AIM 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 OFFICER HAS PROCEEDED TO APPLY RULE 8D WITHOUT GIVING ANY FINDING WITH REGARD TO THE CORRECTNESS OF THE CLAIM MA DE BY THE ASSESSEE REGARDING THE DISALLOWANCE TO BE MADE UNDER SECTION 14A OF THE ACT . 9.2.3. 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, HAV ING REGARD TO THE ACCOUNTS OF THE ASSESSEE, REACHES A FINDING THAT THE ASSESSEE HAD INCURRED ACTUAL EXPENSES WHICH HAVE PROXIMATE NEXUS WITH THE EARNING OF EXEMPT INCOME. HOWEVER, CIT(A) HELD THAT . I AM SATISFIED THAT APPELLANT HAS INCURRED VARIOUS INDI RECT 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 D (2) (III) HAS TO BE DONE. BY APPLYING THE SAME, I COMPUTE THE DISALLOWANCE UNDER SE CTION 14A READ WITH RULE 8D(2)(III) AT RS.39,07,000/ - BEING EXPENDITURE DEBITED TO THE P&L ACCOUNT OTHER THAN INTEREST EXPENDITURE ...... THEREFORE, CIT(A) HAS RECORDED A FINDING THAT CERTAIN A DMINISTRATIVE EXPENSES WERE RELATABLE TO EARNING OF EXEMPT I NCOME. 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 DISALLOWANCE TO ONLY TH OSE ADMINISTRATIVE EXPENSES WHICH ARE DIRECTLY RELATABLE ITA NO S . 793&1106 /DEL /201 3 11 TO EARNING EXEMPT INCOME. MANY EXPE NSES DEBITED TO P&L A/C DOES NOT HAVE PROXIMATE NEXUS/DIRECT RELATION WITH INVESTMENT IN SHARES OR EARNING OF EXEMPT DIVIDEND INCOME THEREOF. FOR EXAMPLE THE EXPENSES OF REPAIR OF BUILDING OR PLANT AND MACHINERY HAD NO NEXUS WITH INVESTMENT IN SHARES/MUTUA L FUND. SIMILARLY, RATES AND TAXES, INSURANCE, AUDITOR FEE ETC. HAVE 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 LIM ITED THE DISALLOWANCE TO THE ADMINISTRATOR EXPENSES WHICH ARE DIRECTLY RELATABLE TO EARNING OF EXEMPT INCOME. 9.2.4. TAKING INTO ACCOUNT THE ABOVE FACTS AND ALSO KEEPING THE (I) JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVES TMENT 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 FINDINGTO THE EFFECT THAT THE ASSESSEE INCURRED ACTUAL EXPENSES WHICH HAD PROXIMATE NEXU S 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 DIRECTLY RELATABLE TO EARNING OF SUCH EXEMPT INCOME. FOR THIS EXE RCISE AT THE LEVEL OF THE AO, THE ISSUE IS RESTORED ON THE FILE OF THE AO. IT IS ORDERED ACCORDINGLY. 10. IN THE RESULT, (I) THE REVENUE S APPEAL IS DISMISSED; & (II) THE ASSESSEE S APPEAL 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 S . 793&1106 /DEL /201 3 12 COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST . REGISTRAR, ITAT, NEW DELHI