AO cannot apply Rule 8D without recording any satisfaction as to how assessee’s calculation of s. 14A disallowance was incorrect

DCIT Vs. Jindal Photo Limited (ITAT Delhi)– As per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee ’s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee.

As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure . This onus has not been discharged. In “CIT v. Hero Cycles” (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions in “ACIT v. Eicher Ltd.” 101 TTJ (Del)369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In “Maruti Udyog v. DCIT” 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee’ s calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the AO is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The ld. CIT(A), therefore, erred in partially approving the action of the AO.

INCOME TAX APPELLATE TRIBUNAL, DELHI

The Dy. Commissioner of Income Tax V. M/s. Jindal Photo Limited

ITA No. 814(Del)2011

Assessment year: 2008- 09

M/s. Jindal Photo Limited V. The Dy. Commissioner of Income Tax

C.O. No. 91(Del)2011

(In ITA No. 814(Del)2011)

Assessment year: 2008- 09

ORDER

PER A.D. JAIN, J.M.

This is Department’s appeal and the cross objections are by the assessee. The Department has taken the following grounds:-

“1. The order of the ld. CIT(A) is erroneous and contrary to facts and law.

“1. That the CIT(A) erred on facts and in law in computing dis-allowance under section 14A of the Income Tax Act, 1061 (“the Act”), amounting to Rs. 19,43,022/-, by applying provisions of Rule 8D of the Income Tax Rules, 1962 (“the Rules”).

2. That the CIT(A) erred on facts and in law in not restricting the dis-allowance under section 14A to the amount of Rs. 13,62,488/-, suo moto disallowed by the appellant in the return of income.”

“5.3 In the light of the binding decisions of Hon’ble jurisdictional Delhi High Court in the case of Shri Ram Honda Power Equipments (supra), which has been followed in a later decision in the case of Delhi Brass & Metal Works Ltd. (supra) and in the light of several decisions of Kerala High Court which has been affirmed by the Hon’ble Supreme Court by way of dismissal of Special Leave Petition as so noted by the Hon’ble Delhi High Court in the case of Shri Ram Honda Power Equipments (supra), and in the light of the decisions of Hon’ble Supreme Court in the case of Liberty India (supra), Pandian Chemicals Ltd.(supra) and other decisions referred to above. It is held that the AO was justified in excluding the interest income pertaining to Dadra and Sambha Units for the purpose of calculation of deduction u/s 80 IB of the Act. As a result, ground of appeal No. 2 is dismissed.”

8. In this regard, we find that indeed, the issue has been decided in favour of the assessee by the Tribunal vide its aforesaid order dated 22.12.2010 (authored by one of us – the J.M.). Therein, it has been held as follows:-

“11. We find that reliance placed by the CIT(A) on “Spot King India Ltd. ”(supra) is proper. In that case, the plea of the assessee regarding claim of deduction u/s 80 IB in respect of insurance claim receipt was accepted. The provisions of section 80 IA are in para materia with section 80 IB of the Act. “Spot King India Ltd.” (supra) being a decision rendered by the jurisdictional High Court of Delhi, is, as such squarely applicable. “Khemka Container Ltd.” (supra) relied on by the AO, against the assessee, is a decision of a non-judicial High Court qua-the-assessee, and, as such, it gives way to the case of “Spot King India Ltd.”, which has been rendered, as noted, by the jurisdictional High Court of Delhi. Accordingly, ground No. 2 raised by the Department is rejected.”

13. The Tribunal (supra), for assessment year 2007-08, had held as follows:-

“17. We have heard the parties on this issue and have perused the material on record. During the year, the assessee had earned exempt dividend income of Rs. 17,97,010/- in respect of investment made in mutual funds. In the return of income filed, a suo moto disallowance  of expenses to the tune of Rs. 1, 73,038/- had been made by the assessee u/s 14A of the Act. In the assessment order, the AO made a disallowance of Rs. 32,18,475/- by applying the method provided in Rule 8D of the I. T. Rules, 1962. This was done without pointing out any inaccuracy in the method of apportionment or allocation of expenses, as adopted by the assessee. All through, the assessee was maintained that the assessee was during the year, carrying on manufacturing activities at its manufacturing units at several places. Its head office was at Delhi. The assessee had maintained separate books of account for each unit. Common expenses incurred at the head office and the branches were attributed to all the units including the head office. Investment in mutual funds, which gave rise to exempt dividend income, was done through the head office. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance had, however, been made by the assessee keeping in consideration, the provisions of section 14A of the Act.

18. Now, as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee ’s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure . This onus has not been discharged. In “CIT v. Hero Cycles” (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions in “ACIT v. Eicher Ltd.” 101 TTJ (Del)369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In “Maruti Udyog v. DCIT” 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In “Wimco Seedlings Limited v. DCIT” 107 ITD 267 (Del) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: