Under the Proviso to s. 92C(2) (pre-amendment w.e.f. 1.10.09) the option to the assessee to choose a price which may vary from the arithmetical mean by an amount not exceeding five per cent is available only where more than one price is determined and not where there is only one comparable instance (Sony India vs. DCIT 114 ITD 448 (Del) & DCIT vs. BASF India not followed. Perot System TSI (India) Ltd 130 TTJ 685 followed)

The second Proviso to s. 92C (2) (as substituted by F (No. 2) Act, 2009 w.e.f. 1.10.09) clearly shows that if the difference is less than 5% then the actual price paid should be considered as arm’s length price. The TPO as well as CIT (A) have clearly observed that difference in respect of these two items is 4% and, therefore, same has to be reckoned in terms of second proviso. Similar view was taken in the case of Sony India vs. Dy. CIT by Delhi Bench of the Tribunal 114 ITD 448

The assessee is maintaining separate books of account for the purpose of business. The tax-free investments are in his personal capacity. As the AO has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. Accordingly, the estimation of expenditure of Rs. 20,000 out of business expenditure as being incurred for earning tax free income is not acceptable

The plea of the assessee based on Minda Investments Ltd that the disallowance should be deleted cannot be accepted as in the later decisions similar matters have been restored to the file of the AO and according to rule of precedence, later decision passed by similar strength of the Bench has to be followed in preference to the earlier decision

As the funds were mixed, it is not possible to ascertain whether the investment in tax free bonds is out of the assessee’s own funds. The source of investment in the tax free bonds was not identified. The AO did not establish any nexus between the borrowed funds and the investments in the tax free bonds. The cash flow of the assessee was not seen. Therefore, the apportionment on a pro rata basis was improper in the absence of anything brought by the AO to rebut the assessee’s stand that the investment in the tax free bonds had been made out of the funds of own funds (Minda Investments, Hero Cycles 323 ITR 518 (P&H) and Winsome Textile Industries 319 ITR 204 (P&H) followed)

Rule 8D r.w.s. 14A(2) can be invoked only 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 tax-free income. However, the assessment order did not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D was not appropriately applied by the AO. The AO merely made an ad hoc disallowance. The onus was on the AO to establish that expenditure was incurred to earn tax-free income. This onus has not been discharged. S. 14A requires a clear finding of incurring of expenditure and no disallowance can be made on the basis of presumptions (CIT vs. Hero Cycles 323 ITR 518 (P&H). The burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s14A (ACIT vs. Eicher Ltd 101 TTJ (Del) 369). Before making any disallowance u/s14A, the onus to establish the nexus of the same with the exempt income, is on the revenue (Maruti Udyog vs. DCIT 92 ITD 119 (Del)). There is be no presumption that the assessee must have incurred expenditure to earn tax free income (Wimco Seedlings vs. DCIT 107 ITD 267 (Del.)(TM))