No Section 14A disallowance without showing how Assessee was Wrong

Maxopp Investment Ltd Vs. CIT (Delhi High Court) – Even for the pre-Rule 8D 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 said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of 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 insofar as the quantum of dis allowance 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 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 said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.

At this juncture, we must make it clear that Dr Rakesh Gupta’s arguments that Rule 8D of the said Rules exceeds the mandate of section 14A, have not been considered by us because the appeals before us are in respect of assessment years prior to the introduction of Rule 8D. We therefore refrain from expressing any opinion on the issue as to whether Rule 8D (and, to what extent, if at all) is ultra vires section 14A of the said Act.

 HIGH COURT OF DELHI AT NEW DELHI

Judgement delivered on: 18.11.2011

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