AO can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee

JK Investors (Bombay) Ltd, New  Vs. ACIT (ITAT Mumbai) –   ITA No.7858/Mum/2011 -Assessment year: 2008-09) – Date of Pronouncement: 13/03/2013

Assessing 0fficer can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the Assessing 0fficer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing 0fficer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. 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 0fficer would have to indicate cogent reasons for the same. Therefore, it is all the more necessary that A0 has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D.

No such examination was made or satisfaction was recorded by A0 in this case. It was noticed that the Assessing 0fficer has not considered the claim of the assessee at all and he has straightway embarked upon computing dis allowance under Rule 8D on the presumption that port folio management involves at least 2% of charges. Dis allowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, dis allowance under section 14A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs. 1,55,44,6 10. Assessee is a hundred crore turnover company. Ao has not examined any expenditure claimed in P& L account so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8D can not be invoked directly without satisfying about the claims or otherwise. Consequently, the dis allowance was not permissible. We therefore, allow the ground of appeal.