Case Law Details
Section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act. Under sub-section (2) of 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-8D of the Rules, 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 the count after making reference to the accounts only then he is entitled to adopt the method as prescribed under Rule-8D of the Rules, thus, Rule-8D is not attracted and applicable in a situation, where, the assessee has voluntarily computed the disallowance as per Rule-8D of the Rules.
RELEVANT EXTRACT OF THE ITAT ORDER
2. Ground no.1, raised by the assessee, pertains to not providing sufficient opportunity of being heard to the assessee and consequent enhancement of disallowance u/s 14A of the Income Tax Act, 1961 (hereinafter the Act) r.w.r-8D of the Income Tax Rules, 1962 (hereinafter the Rules). The crux of the argument on behalf of the assessee, Ld. counsel, Shri Chetan Kariya, is identical to the ground raised. On the other hand, Ms. Vidisha Kalra, ld. CIT-DR, explained that sufficient opportunity was provided to the assessee, therefore, there is no substance in the ground raised by the assessee.
2.1. We have considered the rival submissions and perused the material available on record. We find that the assessment order was framed u/s 143(3) of the Act, whereas, as is evident from page-1 itself, the ld. counsel for the assessee, Shri Vijay C. Kothari along with Shri Vijay Agarwal, appeared and were heard. The arguments advanced by the ld. counsel was duly considered, therefore, we are not satisfied with the argument of the ld. counsel for the assessee that proper opportunity was not provided to the assessee, consequently, this ground of the assessee is dismissed.
3. So far as, ground no. 2 & 3 with respect to computing the disallowance u/s 14A of the Act read with Rule 8D(2)(ii) at Rs.60,04,84,033/- as against the disallowance computed by the assessee at Rs. 1,09,16417/- accepted by the ld. Assessing Officer and consequent disallowance u/s 14A of the Act r.w.r 8D(2)(iii) at Rs.4,63,71,2 13/- as against the disallowance computed by the assessee at Rs. 1 lakh is concerned, the crux of argument, on behalf of the assessee, before us, is that own funds substantially covers the investment made by the assessee as per settled position of law and further the method of calculation followed by the assessee has to be accepted for making disallowance u/s 14A of the Act as has been accepted by the Revenue in the past several years, thus, rule of consistency requires that similar view should be taken in the present year also. It was also explained that the assessee has already made suo-moto disallowance of Rs. 1.10 crores and Rs. 1 lakh.
3.1. On the other hand, the ld. CIT-DR defended the disallowance made by the Assessing Officer and further enhanced by the Ld. Commissioner of Income Tax (Appeal). It was also contended that each year is independent, therefore, addition/disallowance was rightly made by the Assessing Officer. It was also contended that rule of consistency is not applicable in the present case.
3.2. We have considered the rival submissions and perused the material available on record. We find that the Tribunal vide order dated 09/12/2015 ITA No. 4418 /Mum/ 2012, for Assessment Year 2008-09 on identical issue, considered the factual matrix and dismissed the appeal of the Revenue, considering the decision of Hon’ble Calcutta High Court in the case of Dhanuka & Sons (339 ITR 319), relied upon by the Revenue. The decision from Hon’ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (2009) 313 ITR 340 was also considered and then reached to a conclusion, upholding the stand of the Ld. CIT(A) by rejecting the appeal of the Revenue. Identically, for Assessment Year 2009-10 (ITA No.202 and 207/Mum/2013), the Tribunal, vide order dated 27/03/20 15, on the issue of disallowance made under rule-8D(2)(iii) of the Rules, considered the decisions from Hon’ble jurisdictional High Court in Godrej & Boyce Co. Ltd. vs DCIT (328 ITR 8 1)(Bom.) and dismissed the appeal of the Revenue. If all these cases are kept in juxtaposition with the facts of the present appeal, we find that the assessee company made investment by reflecting the same in the balance-sheet. The investments are largely in the group companies and the primary activity is construction, infrastructure development and the investment are in support of the main business. In the assessment proceedings for Assessment Year 2008-09 to 2011-12 (impugned year) the ld. Assessing Officer accepted the working of disallowance, out of interest and for indirect expenses, he applied rule-8D of the Rules. As mentioned earlier, the issue of disallowance of interest was considered by the Ld. Commissioner of Income Tax (Appeal) as well as by the Tribunal and decided the issue in favour of the assessee. The assessee has identified and quantified specific amount of interest expenses and also the investment with borrowed funds in the past and the investments have been co-related. It is also noted that even the Ld. Assessing Officer, as in the past, allowed the interest. The Assessing Officer was satisfied with the disallowances, suo-moto made by the assessee. It is noted that in all the earlier years i.e. Assessment Year 2008-09 to 2010-11, the issue of disallowance was considered by the Ld. Commissioner of Income Tax (Appeal) as well as the Tribunal. On the issue of disallowance, out of interest expenses, the Ld. Commissioner of Income Tax (Appeal) reduced the disallowance to Rs. 10 lakh and the Tribunal affirmed the order of the First Appellate Authority. For the year under appeal, the Ld. Commissioner of Income Tax (Appeal) affirmed the order of the Assessing Officer on the point of disallowance out of expenses. The Ld. Commissioner of Income Tax (Appeal) issued enhancement notice dated 20/02/20 15, asking the assessee to file the reply. The assessee requested for adjournment but the request was denied and order was passed by the Ld. CIT (Appeal) applying Rule-8D(ii) in respect of disallowance of interest. Considering the totality of facts, we find that so far as the disallowance out of indirect expenses is concerned, as claimed by the assessee, the issue is covered by the decision of earlier years.
3.3. So far as, the issue of disallowance of other amount out of interest by applying rule-8D(ii) is concerned, we find that the amounts are identified and quantified and specific amount of interest expenses were incurred towards investment. The assessee duly maintained the books and followed the appropriate method. The method adopted by the assessee can only be rejected with objective reasons based upon books of accounts of the assessee. Except for saying that the investment are more than own funds, the Ld. CIT (Appeal) has not pointed any error in the working of the assessee. Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.) clearly held that Rule-8D can only be applied if the objective reasons are given for rejection of method, adopted by the assessee. From pages 103 to 129 (copy of balance sheet and investment) it is evidently clear that the investment are very old and no much time and energy was employed by the assessee while making the investment or in collection of dividend. Section 14A of the Act says, where the assessee has made suo-moto disallowance, then the books of accounts has to be looked into. So far as, the dissatisfaction is concerned, it cannot be merely on the basis of volume as was held by Hon’ble jurisdictional High Court in various decisions which will be discussed in later part of this order, like Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) and East India Pharmaceutical Works Ltd. vs CIT (224 ITR 624)(SC) and Gujarat High Court in CIT vs Suzlon Energy Ltd. (354 ITR 630)(Guj.) and also by Hon’ble Delhi High Court in COMMISSIONER OF INCOME TAX vs. TAIKISHA ENGINEERING INDIA LTD.(2015) 275 CTR 0316 (Del): (2015) 114 DTR 0316 (Del) : (2015) 370 ITR 0338 (Delhi) : (2015) 229 TAXMAN 0143 (Delhi), the relevant portion of the order is reproduced hereunder for ready reference and analysis:-
“8. The Income Tax Appellate Tribunal (‘Tribunal’, for short) by a common order dated 27th September, 2013 has dismissed the appeals filed by the Revenue. Rule 8D of the Rules it was held was applicable and the issue related to computation under sub Rule (2) and the three sub-clauses.Reference was made to clause (ii) of sub Rule (2) to Rule 8D of the Rules and it has been held:-
“2.4. … Only clause (ii) is involved in the present appeal. The AO considered the total interest paid by the assessee for allocating a sum of [Rs.] 36.76 lakh to the investments yielding exempt income. At the threshold it needs to be determined as to whether any interest expenditure can be attributed to the securities on which such exempt income was earned. The question of disallowance of such interest u/s 14A would arise only if some expenditure is said to have been incurred in relation to investment in such securities. In this regard, it is observed that the assessee made total investment of [Rs.] 6.33 crore in shares or securities resulting into exempt income. As against that share holder funds stood at [Rs.] 53.79 crore at the end of the year. Thus, it is evident that the amount invested in such shares or securities is far in excess of share holders’ funds.”
9. Reference was made to the decision of the Delhi High Court in CIT vs. Tin Box Co. [2003] 260 ITR 637 (Del) to hold that when the assessee had sufficient funds and non interest funds were advanced to a sister concern, no disallowance was justified. Further, the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom.) had similarly held that when sufficient non interest funds were available for investment then no disallowance of interest should be made. The Bombay High Court had placed reliance on the decision of East India Pharmaceutical Works Ltd. vs. CIT [1997] 224 ITR 624 (SC) to the effect that if the assessee had sufficient non interest funds, then investment made in shares and securities resulting in exempt income should not lead to disallowance of interest expenditure, as there was no question of attributing any interest to such investments. Lastly, reference was made to the decision of the Gujarat High Court in CIT vs. Suzlon Energy Ltd. [2013] 354 ITR 630, to the same effect.
10. Having heard the Counsel for the parties, we feel that the respondent assessee is entitled to succeed on somewhat different grounds and reasons, than those elucidated by the Tribunal.
18. It is in this context we feel that the findings recorded by the CIT(A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent assessee and against the Revenue. The self or voluntary deductions made by the assessee were not rejected and held to be unsatisfactory, on examination of accounts. Judgments in Tin Box (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if the satisfaction of the Assessing Officer is in issue, and such question of satisfaction is with reference to the accounts.
19. However, the decisions relied upon by the Tribunal in the case of Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy (supra) and East India Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute the disallowance under Rule 8D of the Rules. The said Rule in sub Rule (2) specifically prescribes the mode and method for computing the disallowance under Section 14A of the Act. Thus, the interpretation of clause (ii) to sub Rule (2) to Rule 8D of the Rules by the CIT(A) and the Tribunal is not sustainable. The said clause expressly states that where the assessee has incurred expenditure by way of interest in the previous year and the interest paid is not directly attributable to any particular income or receipt then the formula prescribed would apply. Under clause (ii) to Rule 8D(2) of the Rules, the Assessing Officer is required to examine whether the assessee has incurred expenditure by way of interest in the previous year and secondly whether the interest paid was directly attributable to particular income or receipt. In case the interest paid was directly attributable to any particular income or receipt, then the interest on loan amount to this extent or in entirety as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, the amount to be disallowed as expenditure relatable to exempt income, under sub Rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.5% of the average amount of value of investment, appearing in the balance sheet on the first day and the last day of the assessee has to be disallowed.
20. However, in the present case we need not refer to sub Rule (2) to Rule 8D of the Rules as conditions mentioned in sub Section (2) to Section 14A of the Act read with sub Rule (1) to Rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub Rule (2), without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub Rule (2) to Rule 8D of the Rules and made the re-computation. Therefore, the respondent assessee would succeed and the appeal should be dismissed.”
3.4. In the aforesaid decision, Hon’ble High Court duly analyzed section 14A of the Act r.w.r 8D of the Rules. Reference was also made to the decision from Hon’ble Delhi High Court in CIT vs Tin Box Company (2003) 260 ITR 637 (Del.) by holding that when the assessee had sufficient funds and non-interest funds were advanced to sister concern, no disallowance was justified. Even the Hon’ble jurisdictional High Court in CIT vs Reliance Utilites and Power Ltd. (2009 313 ITR 340 (Bom.), had similarly held that when sufficient non-interest funds were available for investment then no disallowance of interest should be made. The Hon’ble High Court placed reliance upon the decision from Hon’ble Apex Court in East India Pharmaceutical Works Ltd. vs CIT (1997) 224 ITR 624 (SC) to the effect that if the assessee had sufficient non-interest bearing funds, then investment made in shares and securities resulting in exempt income should not lead to disallowance of interest expenditure as there was no question of attributing any interest to such investment. Reference can also be made to the decision from Hon’ble Gujarat High Court in CIT vs Suzlon Energy Ltd. (2013) 354 ITR 630 to the same effect. In the light of the foregoing discussion, we are reproducing hereunder section 1 4A of the Act, which is very much relevant for analysis of facts.
“14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”
3.5. 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, he can determine the amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e. Rule 8D 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 8D of the Rules. Thus, Rule 8D is not attracted and applicable to assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D 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 8D of the Rules. This pre-condition and stipulation as noticed below is also mandated in sub Rule (1) to Rule 8D of the Rules.
3.6. Now, we shall analyze Rule-8D of the Rules, which is reproduced hereunder:-
“8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:—
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely : — A x B/C
Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;
B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;
C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
(3) For the purposes of this rule, the “total assets” shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.”
Sub Rule (1) categorically and significantly states that the Assessing Officer having regard to the account of the assessee and on not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income under the Act, can go on to determine the disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will not come into operation until and unless the specific pre-condition in sub Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made.
3.7. Now, we shall analyze scope of sub-section (2) and (3) of Section 14A of the Act. Sub-section (2) of Section 14 A of the Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer, embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A of the Act. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. 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 Officer would have to indicate cogent reasons for the same.
3.8. Rule 8D, as we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is – “such method as may be prescribed”. We have already mentioned above that by virtue of Notification No.45 of 2008, dated March 24, 2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with
(a) the correctness of the claim of expenditure made by the asses see; or
(b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year. The Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D.
3.9. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Subsections (2) and (3) of Section 14A of the Act, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components.
i. The first component being the amount of expenditure directly relating to income which does not form part of the total income.
ii. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee.
iii. The third component is an artificial figure-one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects –
(a) The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. and
(b) The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken.”
3.10. Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. versus Deputy Commissioner of Income Tax (2010) 328 ITR 81 (Bom.) had referred to Section 14(2) of the Act and observed:-
“Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression “prescribed” in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules.
For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154.”
3.11. Equally illuminating are the following observations in Godrej and Boyce Mfg. Co. Ltd. (supra)
However, if the assessee does not maintain separate accounts, it would be necessary for the Assessing Officer to deter-mine the proportion of expenditure incurred in relation to the dividend business (i.e., earning exempt income). It is for exactly such situations that a machinery/method for computing the proportion of expenditure incurred in relation to the dividend business has been provided by way of section 14A(2)/(3) and rule 8D.”
3.12. More important and relevant for us are the observations in Godrej and Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by the Assessing Officer with reference to the accounts under Section 14(2) of the Act and Rule 8D(1) of the Rules. It was observed:-
“Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer “Courts will not readily defer to the conclusiveness of an executive authority’s opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated”. (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2).”
3.13. The sum and substance of the foregoing discussion is that section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act. Under sub-section (2) of 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-8D of the Rules, 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 the count after making reference to the accounts only then he is entitled to adopt the method as prescribed under Rule-8D of the Rules, thus, Rule-8D is not attracted and applicable in a situation, where, the assessee has voluntarily computed the disallowance as per Rule-8D of the Rules.
3.14. So far as the argument of the assessee with respect to rule of consistency is concerned, we note that in the previous and subsequent assessment years, the Assessing Officer treated the assessee as an investor,
