Case Law Details
Pr. CIT Vs Britannia Industries Ltd (Calcutta High Court)
If an assessing officer doubts the quantum of expenditure incurred towards exempted income, is it mandatory for the assessing officer to apply the formula prescribed in rule 8D of the Income Tax Rules, 1962 or can he take a view otherwise? This is the question which is involved in this appeal. In the assessee’s case, the assessing officer took the latter course while dealing with expenditure shown by the assessee towards exempted income, being income from dividend in this case.
Rule 8D of the Income Tax Rules will apply only for assessment years 2008-09 and subsequent assessment years. It has also been laid down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the assessing officer and only if on an objective satisfaction arrived at by the assessing officer that the claim made by the assessee is not correct, can the assessing officer proceed to apply the computation mode as specified in rule 8D(2) of the Rules. If the assessing officer comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the assessing officer can proceed to make the disallowance in terms of rule 8D of the Rules. Even in a case where the assessing officer rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. By applying the rule 8D of the Rules blindly sometimes absurd disallowances would result. In our view, therefore while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the assessing officer is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by rule 8D(2) of the Rules. It is for this reason that the satisfaction of the assessing officer regarding expenses incurred for earning exempt income is to be objective satisfaction. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to rule 8D(2) can be had by the assessing officer. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. It cannot therefore be said that once the assessing officer rejects the mode of computation of disallowance under section 14A of the Act as made by the assessee, he has no other option but to resort to rule 8D of the Rules.
Sub-sections (2) and (3) of section 14-A of the Act read with rule 8-D 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 8-D 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 sections 14-A(2) and (3) read with rule 8-D of the Rules or a best judgment determination, as earlier prevailing, would become applicable
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
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