M/S. AMAR PACKAGINGS PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

Ld. AR for the assessee submitted that the assessee has made investment in 6. shares and securities for earning capital appreciation and earning dividend income is incidental to such activities. He submitted that the assessee has incurred interest expenses to earn taxable income such as trading profit and capital gains. He submitted that the dividend income was not arising on all investment held by the assessee and earning of dividend income was due to holding of investments. He further submitted that the assessee has filed a revised computation claiming expenditure of Rs.61,666/- being incurred for earning income as exempt income.

He submitted that assessee had paid salary of Rs.1,20,000/- to one person and DMAT charges of Rs.3,332/- and claimed that 50% of such expenses i.e. Rs.61,666/- (0.50% of Rs.1,20,000/- + Rs.3,332/- = Rs.1,23,332/-) were incurred for earning the exempt income. He submitted that Section 14A is applicable only if some expenditure has actually been incurred by the recipient of tax free income. He further submitted that only expenditure which has been proved to have been incurred in relation to the earning of tax-free income can be disallowed and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning of tax free income. The word "incurred" refers to the actual spending of the expenditure in relation to the exempt income and does not refer to deemed spending or assumed spending for the purpose. Ld. AR submitted that the AO completely ignored the submissions of the assessee and without recording any satisfaction, straight away applied the provisions of Rule 8D of the Rules and made the disallowance. Ld. AR further submitted that in any case, the disallowance u/s 14A cannot exceed tax free income of the assessee. In this regard, he relied on the following decisions :-

(i) CIT vs. Taikisha Engineering India Ltd. –370 ITR 338 (Del.);

(ii) ACIT, Circle II, Faridabad vs. NHPC Ltd. – dated 26th August, 2015 He also relied on a number of decisions in the written synopsis filed by him. Thus, ld. AR pleaded that the orders of the authorities below be set aside and the addition be deleted.

"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 80 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 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 80 of the Rules. Thus, Rule 80 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 80 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 80D of the Rules. This precondition and stipulation as noticed below is also mandated in sub Rule (1) to Rule 80 of the Rules."

After going through the other cases also, relied upon by the ld. AR, we find that the AD has not recorded the satisfaction envisaged by the statute before invoking the computation provided for under Rule 8D, which vitiates the impugned order. We also find that in assessee's own case for the previous year also, the Tribunal has deleted the addition made by the AD on this account. Therefore, we uphold the order of the CIT (A) on this issue. This ground of revenue's appeal is dismissed."

We find that the assessee has earned exempt income to the tune of Rs.17,56,369/- and has suo motu disallowed Rs.61,666/- u/s 14A of the Act. We find that the AO has invoked Rule 8D without pointing out any reason for not being satisfied with the computation made by the assessee in respect of expenditure incurred for earning exempt income. The Hon’ble jurisdictional High Court in CIT vs. Tikisha Engineering India Ltd. (supra) has held that without recording the objective satisfaction as required under sub-section (2) to section 14A that the AO is not satisfied with the correctness of the claim of the assessee in respect of expenditure in respect of exempt income, the AO cannot invoke Rule 8D to compute the said disallowance under the said Rule. Therefore, we find substance in the argument of the ld. AR and so, we find that without recording satisfaction as envisaged by the statute before invoking the computation provided for under Rule 8D has vitiated the impugned order. In this case we also note that exempt income is to the tune of Rs.17,56,369/- whereas the disallowance is to the tune of Rs.1,13,77,730/- which is 647% of the exempt income, which cannot be the interpretation for computing disallowance as per section 14A or Rule 8D as held recently by the Hon’ble jurisdictional High Court in the case of Joint Investment Pvt. Ltd. vs. CIT – (2015) 372 ITR 694 (Del.) wherein it has been held “By no stretch of imagination, can section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt is to be disallowed. The window for disallowance is indicated in section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” Therefore, we direct deletion of the addition made by the AO and which was sustained by the CIT (A) in his impugned order. This ground of the assessee succeeds and the appeal is allowed.