K.L. RATHI STEELS LTD.,DELHI vs. ADDL. CIT, NEW DELHI

(PAN : AAACK1141M) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ashish Chadha, Advocate REVENUE BY : Shri Janardan Dass, Senior DR Date of Hearing : 10.09.2018 Date of Order : 17.09.2018 O R D E R

PER KULDIP SINGH, ACCOUNTANT MEMBER :

“1. That on facts and circumstances of the case and in law, the learned CIT(A) seriously erred in upholding the disallowance of Rs.6,73,286/- out of interest expenses incurred by the appellant inspite of the fact that appellant having proved that no part of the said expenses are related to earning of Dividend Income.

2. That the learned lower authorities totally failed to prove that there exist a nexus between earning of Dividend Income and incurring interest expenditure by the appellant, the disallowance made by the learned lower authorities without proving is wholly arbitrary, without any basis in support thereof and totally based on assumption & presumption, thus the disallowance made by the Assessing Officer and uphold by the learned CIT(A) deserve to be deleted.

3. That holding by the learned CIT(A) that appellant has not explained the disallowance of Rs.1,86,600/- made in the return of income either before the Assessing Officer or before CIT(A), is totally contrary to facts on record and wholly incorrect as the said disallowance is made as per Rule 8D (2)(iii) of the Income Tax Rules as evident from the assessment order itself inspite of the fact that the appellant have not incurred any such expenditure for earning Dividend income, thus the said disallowance is also deserves to be deleted.

4. That the observation by the learned CIT(Appeals) regarding expenses incurred in relation to "Portfolio Investments" is totally misunderstood and that too without giving opportunity to appellant to explain the modus operandi of the said investments being managed by the portfolio investments management company.

5. The ld. AR for the assessee challenging the impugned order passed by the ld. CIT (A) contended inter alia that the AO proceeded to invoke the provisions contained u/s 14A read with Rule 8D without recording his dis-satisfaction as to the working out of suo moto disallowance made by the assessee; that the AO has not taken into account that the assessee has suo moto made disallowance of Rs.1,86,600/-.

“Section 14A even prior to the introduction of sub- sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of .sub-section (2) of section 14A . Prior to that, the assessee was free to adopt any reasonable and acceptable method. So, even for the pre-rule 80 period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in' relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.”

“37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”