In a recent ruling, the division bench of the ITAT Kolkata held that while invoking Rule 8D, the A is bound to point out that whether there was any expenditure incurred by the assessee in earning the exempt income.
In the instant case, the assessee has received the dividend income to the tune of Rs.20,03,267/- for which the assessee claimed that there was no expenditure incurred for earning the said income. The AO completed assessment by disallowing the expenditure claimed by the assessee as per Rule 8D. While rejecting the claim of allowance, the AO observed that since the assessee has shown the dividend income of Rs.20,03,267/- which does not form part of the total income so it attracts section 14A and Rule 8D. The assessee maintained that the said expenses has nothing to do with the earning of exempt income.The assessee contended that the addition is not tenable since the Officer invoked Rule 8D without recording satisfaction as required by section 14A of the Act.
Section 14A of the Income Tax Act states that, for the purpose of computation the total income under Chapter IV (computation of income),no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income.
“The requirement of the AO embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the AO 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 AO entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that AO must record that he is not satisfied with the correctness of the claim of the assessee in respect of them then he has to compute in accordance with the method prescribed i.e. as per Rule 8D. Sub-section (3) will be attracted when the assessee claims that no expenditure has been incurred for earning the exempt income then in that case, recourse has to be taken to the procedure prescribed in sub-section (2) which means that when the assessee claims that he has earned the exempt income and has not incurred any expenditure then what the AO should do is as prescribed in sub-section (2) i.e. 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 such expenditure in relation to the income then he has to make disallowance in accordance with Rule 8D. So as per section 14A(2) the exercise of the computation of Rule 8D can be made only if the AO having regard to the accounts of the assessee , in this case, as to his claim that no expenditure having being incurred for earning the exempt income. Here the main thrust of the argument of the assessee is that AO has not brought anything on record to suggest that the claim of the assessee having not incurred any expenditure for earning exempt income have been made out before invoking Rule 8D.” the bench said.
The division bench noted that the reason recorded by the AO is not sufficient to invoke Rule 8D. “The AO has not given any finding that any of the expenditure claimed by the assessee is attributable to earning exempt income, without which the AO cannot invoke Rule 8D. In other words when the AO has not pointed out that certain expenditure is not incurred for earning the business income but are incurred in relation to the dividend income he cannot resort to Rule 8D. The Hon’ble High Court of Punjab and Haryana in the case of CIT vs Deepak Mittal  38Taxmann.com 83 has held that the AO without application of mind and without bringing on record any expenditure that may have been incurred by the assessee to earnexempt income cannot apply the formula set out in Rule 8D. Therefore by applying the principle laid down by the Hon’ble High Court and as per the decision of the Hon’ble Supreme Court in the case of CIT vs Walfort Share & Stock Brokers (P)Ltd 326 ITR 1 (SC) and Maxopp Invest Ltd vs CIT 347 ITR 272 (Del) Wherein it has been held that for attracting the provision of section 14A there should be actual expenditure in relation to or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the Act. In this case the AO failed to point out that as to whether there was any expenditure incurred by the assessee in earning the exempt income.” accordingly, the additions were deleted.
Read the full text of the order below.