|COURT:||Delhi High Court|
|CORAM:||Deepa Sharma J, Ravindra Bhat J|
|SECTION(S):||14A, Rule 8D|
|CATCH WORDS:||Disallowance u/s 14A & Rule 8D|
|DATE:||August 11, 2016 (Date of pronouncement)|
|DATE:||August 30, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
S. 14A Rule 8D: The AO must examine the accounts closely and determine if at all any expenditure could be ascribed to the tax exempt dividend/interest earned by the assessee. If the tax exempted income was earned without the interference of any employee the question of attributing any expenditure cannot arise at all
The assessee reported a tax exempt dividend income of Rs10,87,898 and he had, however, not claimed any expenditure for earning that income. Purporting to apply the statutory disallowance under Section 14A read with Rule 8D of the Income Tax Rules, the AO ascribed a sum of Rs. 1,21,805 and added it back to the taxable income. The assessee contended that the methodology adopted and entire approach of the revenue is foul. He urged that the bulk of the tax exempted income was earned interest which was credited to the bank account and also with respect to the dividends earned went straight into the personal bank account without the interaction of any special personnel. The revenue on the other hand urged that the assessee carries on business and in the course of such business he engaged an accountant who was also tasked with the job of looking after the accounts and investments which yielded a sum of Rs. 10,87,898. HELD by the High Court:
(i) In Commissioner of Income Tax vs. Taikisha Engineering Private Limited 370 ITR 338 (Del) the court had after analysing Section 14A and Rule 8D (of the Income Tax Rules) held as follows:
“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 subrule (2) to Rule 8D of the Rules. Sub-rule (2) will not come into operation until and unless the specific precondition 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 subrule (2) to rule 8D of the Rules is to be made.”
(ii) In the present case, the AO has not analysed objectively in terms of the decision in Shah. It was firstly incumbent upon him to in fact examine the accounts closely and determine if at all any expenditure could be ascribed to the tax exempt dividend/interest earned by the assessee. If indeed the tax exempted income was earned without the interference of any employee but rather through the solicitation and advertisement of the bank the question of attributing any expenditure cannot arise at all.
In the light of the verdict in Hero Cycles (P) Ltd vs. CIT (Supreme Court) | itatonline.org, the apex court may have to be regarded to have, -construing, in its wisdom, invoking and applying the very basic and fundamental principle of ‘commercial expediency’ applicable uniformly to all such cases, – finally settled the legal position; thereby shut the doors leaving no scope for most disputes on any narrow or frivolous ground such as that canvassed in the instant case.
Is not time ripe enough as yet, for the SC itself, in exercise of its wide powers, to issue a mandate / directive, for positive guidance, to decide accordingly, all cases at wherever stage pending; thereby put an end once for all to the disgusting procrastination of litigation, to the great relief of courts; and, more importantly, in profound public interest’ as well.
And, the South Block / the Revenue, on its part, should be recommended to wholeheartedly extend its co-operation,and follow on, to accomplish the very same outcome.